A chemical company releases poisonous fumes, which create costs for society. The diagram below shows the firm’s product at the free market equilibrium, P1Q1. The government places a tax of XY on the firm. How would this lead to better 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.