Chapter 16, Problem 2P

To determine

Concept Introduction:

Externalities: Any external factor which causes either a benefit or loss to the producers and these benefits or losses do not get reflected in the market price of a good or service and not even reflected in the accounts of a producer, then this is known as externalities. It may be a loss for one party and gain for the other.

The positive externality can be said as an external benefit, whereas the negative externality can be said as an external cost

Pigouvian tax: This tax is laid on the market activity which indulges in generating the negative externality, it is generally set equal to the social cost that the negative externality generates, and it is laid to correct the inefficient outcome of the market.