The biggest difference between using a Pigovian tax or a tradable allowance to correct for a negative externality is:
A)the government collects revenues from a Pigovian tax, whereas a tradable allowance allows private parties to trade quota rights on their own.
B)a Pigovian tax creates an efficient outcome, while a tradable allowance does not.
C)a Pigovian tax maximizes total surplus, whereas a tradable allowance does not.
D)All of these are differences between Pigovian taxes and tradeable allowances.

Question

Quizplus · Accepted Answer

A Pigovian tax is a tax imposed on any market activity that generates negative externalities (costs not internalized in the market price). The government collects revenues from this tax. In contrast, a tradable allowance system (also known as cap-and-trade) sets a cap on the total level of a certain type of pollution and allows companies to buy and sell allowances that permit them a certain amount of pollution under the cap. This system does not inherently generate government revenue, as it allows private parties to trade these rights among themselves. Both mechanisms can lead to efficient outcomes and maximize total surplus under certain conditions, making B and C incorrect.

The Biggest Difference Between Using a Pigovian Tax or a Tradable