A Pigovian tax:
A)counters the effect of a negative externality.
B)decreases efficiency in a market.
C)decreases total surplus in a market.
D)All of these statements are true.

Question

Quizplus · Accepted Answer

A Pigovian tax is a tax on a good or service that creates a negative externality, such as pollution or congestion. The purpose of the tax is to internalize the externality by making the person responsible for the negative effect pay for it. Therefore, it counters the effect of a negative externality. The other options, B and C, are incorrect, as a Pigovian tax actually increases efficiency in a market by reducing the negative externality, and it can potentially increase total surplus by providing revenue for the government that can be used to fund public goods or reduce other taxes.

A Pigovian Tax