A corrective tax can improve upon the misallocation of resources resulting from an externality _____.
A)only if the externality is positive
B)only if it is easy to quantify the external damage
C)transactions costs are low
D)transactions costs are zero

Question

Quizplus · Accepted Answer

A corrective tax is a tax levied on an activity that generates negative externalities, in order to offset the social costs of that activity. However, in order for the tax to be effective, it is necessary to quantify the external damage that the activity generates. This can be difficult in practice, particularly for externalities that are difficult to measure or predict. Therefore, B is the correct answer, as it acknowledges that an accurate measure of the external damage is a key factor in the effectiveness of a corrective tax.

A Corrective Tax Can Improve Upon the Misallocation of Resources