The logic of the double-dividend hypothesis may not hold because the Pigouvian tax exacerbates pre-existing distortions in the labor market.

Question

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The double-dividend hypothesis suggests that environmental taxes can have an economic benefit by not only reducing pollution but also generating revenue that can be used to reduce other taxes. However, the Pigouvian tax (an environmental tax meant to correct negative externalities) can actually worsen pre-existing distortions in the labor market, such as unemployment or income inequality. This means that the logic of the double-dividend hypothesis may not hold in this situation.

The Logic of the Double-Dividend Hypothesis May Not Hold Because