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 (Pigouvian Taxes)
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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: -Arthur Cecil Pigou (1877–1959) proposed a solution to the problem of externalities that has become a standard approach. This simple idea is to impose a per-unit tax on a good, thereby generating negative externalities equal to the marginal externality at the socially efficient quantity.
Detailed explanation-3: -A Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes.
Detailed explanation-4: -The Pigouvian tax rate is the marginal external cost (MEC) at the Pareto-efficient output level.
Detailed explanation-5: -Effect of a Pigouvian Tax The implementation of a carbon tax will raise the price of electricity and reduce the demand, in effect both reducing pollution and generating government revenue for investment in new technologies and energy alternatives. At Point A the market is efficient, the supply meets demand.