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How should the economy reallocate the inputs

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Suppose there are two firms, two goods, and there is a presence of negative externality. Hence, the additional unit of input in the production of good Y affects the production of good X. Currently, labor and capital is equally divided and reallocated to goods X and Y. The externality causes SMRP of labor or capital of X to be greater than SMRP of Y. How should the economy reallocate the inputs (labor and/or capital) in order to achieve economic efficiency and have SMRP=SMRP?

Reference no: EM133063891

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