The table below shows the marginal private and external benefits, and the marginal private and external costs, of two products, Product X and Product Y, at their free market equilibrium level of output:
| Product X (£) | Product Y (£) | |
|---|---|---|
| Marginal private benefit | 150 | 80 |
| Marginal external benefit | 20 | 50 |
| Marginal private cost | 150 | 80 |
| Marginal external cost | 70 | 10 |
To improve the allocation of resources, what should the government do?
Tax Product X and subsidise Product Y
Subsidise Product X and tax Product Y
Subsidise both Product X and Product Y
Tax both Product X and Product Y
