A Pigouvian tax:
A) is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
B) subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
C) is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss.
D) is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.

Question

Quizplus · Accepted Answer

A Pigouvian tax is a tax levied on a good that creates negative externalities, such as pollution or noise, in order to internalize the social cost of the externality. The tax should be set equal to the external cost in order to eliminate the deadweight loss caused by the negative externality. By raising the cost of production or consumption, the tax incentivizes individuals and firms to reduce their consumption or production of the good, which reduces the negative externality and leads to a more efficient allocation of resources.

A Pigouvian Tax