Economics (AS & A Level) · May / June 2026 · Paper 32 · Question 11
9708Private costs and benefits, externalities and social costs and benefits
A chemical firm produces toxic fumes that impose costs on society. The diagram shows the free market equilibrium of the firm's product at P1Q1. The government imposes a tax on the firm of XY. How would this improve resource allocation?
- AIt will internalise the external benefit.
- BIt will internalise the external cost.
- CIt will internalise the private benefit.
- DIt will internalise the private cost.
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Correct answer: B. It will internalise the external cost.
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