Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?
A)Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol.
B)Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders.
C)Corrective taxes provide incentives for the conservation of natural resources.
D)Corrective taxes do not affect deadweight loss.

Question

Quizplus · Accepted Answer

Corrective taxes are designed to correct market failures caused by negative externalities, such as pollution. By accounting for the costs that are imposed on society as a whole, corrective taxes align incentives with the social optimum and do not distort resource allocation as much as other taxes. In this way, corrective taxes can lead to a more efficient allocation of resources and avoid some of the disadvantages of other taxes. Choice A is incorrect because corrective taxes can be used for any good with negative externalities, not just ones related to health. Choice C is incorrect because while corrective taxes can encourage the conservation of natural resources, this is not the main reason why they avoid the disadvantages of other taxes. Choice D is incorrect because corrective taxes can still cause deadweight loss, but they are less likely to do so than other taxes because they help to correct market failures.

Most Taxes Distort Incentives and Move the Allocation of Resources