The tax on gasoline
A)reduces efficiency by causing large deadweight losses.
B)reduces efficiency by decreasing consumer surplus and producer surplus.
C)enhances efficiency by serving as a corrective device in a market with positive externalities.
D)enhances efficiency by serving as a corrective device in a market with negative externalities.

Question

Quizplus · Accepted Answer

The tax on gasoline enhances efficiency by serving as a corrective device in a market with negative externalities. The negative externality associated with gasoline use is pollution, which imposes costs on society by damaging the environment and public health. By taxing gasoline, the government can internalize the external cost and make consumers pay for the full social cost of their consumption. This incentivizes consumers to use gasoline more efficiently, switch to alternative modes of transportation, or adopt cleaner technologies, leading to a more efficient allocation of resources and a reduction in the negative externality.

The Tax on Gasoline