Economics • Economic BasicsHard
What does the 'Pigouvian Tax' seek to correct in the presence of market externalities?
A. Inefficiencies arising from asymmetric information between buyers and sellers in financial contracts
B. Negative externalities such as environmental pollution by internalizing social costs into private pricing✓ Correct Answer
C. Monopolistic pricing behaviors that restrict market output and harm consumer surplus
D. Deadweight losses caused by government imposition of distortionary sales and excise taxes
💡 Solution & Explanation
A Pigouvian tax is levied on economic activities that generate negative externalities, such as carbon emissions, to equate private costs with social costs. Named after Arthur Pigou, this tax forces producers to internalize the external damage they cause, thereby restoring allocative efficiency to the market. Incorrectly viewing it as a revenue-raising instrument ignores its primary corrective economic function. The tax rate is ideally set equal to the marginal external damage at the socially optimal output level.
More Economics Economic Basics questions
- In welfare economics, what does the 'Scitovsky Criterion' attempt to resolve?
- In neoclassical economics, what does the 'IS-LM' model primarily demonstrate?
- Which of the following describes the condition for long-run equilibrium in a monopolistically competitive…
- What is the primary implication of the 'Modigliani-Miller Theorem' in corporate finance assuming no taxes and…
- Analyze the theoretical mechanics of the 'Gini Coefficient' in measuring income distribution. If a country's…