ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Taxes designed to reduce external costs.
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A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.
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A tax in which the average tax rate increases with income.
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A tax in which the average tax rate decreases as income increases.
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A tax in which the average rate of tax is constant regardless of income level.
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Detailed explanation-1: -A Pigovian tax is intended to tax the producer of goods or services that create adverse side effects for society. Economists argue that the costs of these negative externalities, such as environmental pollution, are borne by society rather than the producer.
Detailed explanation-2: -What are corrective taxes? Corrective (or “Pigouvian”) taxes can be used to correct for the presence. of externalities or “internalities” in a market: • externality: costs imposed on others. • internality: costs imposed on the individual themselves.
Detailed explanation-3: -Taxes on gas to reduce pollution or on carbon dioxide emissions to reduce greenhouse gases are classic examples of this approach.
Detailed explanation-4: -A corrective tax can adjust costs to reflect externalities by ensuring that the price of externalities are born by the producers. A gasoline tax, for example, increases the price of gasoline so that consumers now pay for the cost of pollution and cars that use more gas and pollute more pay a higher cost.