A Pigouvian tax can lead to the efficient level of production and consumption of:
A)a public good.
B)a common resource.
C)an artificially scarce good.
D)no goods, since all taxes create inefficiency.

Question

Quizplus · Accepted Answer

A Pigouvian tax is used to account for the external costs associated with consumption or production of a good, and aims to align private incentives with social costs. Common resources create negative externalities when they are overused, so a Pigouvian tax can lead to the efficient level of production and consumption. Choice A is incorrect because public goods do not have excludability or rivalry, making them difficult to tax efficiently. Choice C is incorrect because an artificially scarce good is not subject to negative externalities, so a Pigouvian tax is not appropriate. Choice D is incorrect because Pigouvian taxes can correct market failures and promote efficiency.

A Pigouvian Tax Can Lead to the Efficient Level of Production