A corrective tax
A)allocates pollution to those factories that face the highest cost of reducing it.
B)is a form of regulation.
C)works well for all types of externalities.
D)is inferior to regulatory policy according to most economists.

Question

Quizplus · Accepted Answer

A corrective tax is a market-based policy designed to internalize the external costs associated with pollution. By imposing a tax on pollution, firms are incentivized to reduce their emissions to avoid paying the tax. The tax will be set at a level equal to the marginal external cost of pollution, which ensures that pollution will be reduced to a socially optimal level. This ensures that the pollution is allocated to those factories that face the highest cost of reducing it. Therefore, choice (A) is the correct answer. Choices (B), (C), and (D) are incorrect because while (B) is true, choices (C) and (D) are false.

A Corrective Tax