Suppose the Government Imposes a Per Unit Tax on an Item

Multiple Choice

Suppose the government imposes a per unit tax on an item whose production process creates a negative externality. Suppose the tax is exactly the value of the marginal externality cost. If the government now uses the tax revenue to clean up pollution from this process, the market will:

A) have internalized all costs and benefits.
B) have used a command-and-control policy rather than a market-based policy.
C) underproduce the good that is resulting in the negative externality.
D) reduce the costs to the buyers and sellers of the good.