The logic of the double-dividend hypothesis may not hold because the Pigouvian tax exacerbates pre-existing distortions in the labor market.
A) True
B) False
C) Uncertain

Question

Quizplus · Accepted Answer

The double-dividend hypothesis suggests that imposing a Pigouvian tax can not only address the environmental problem but also improve the economy by reducing other taxes or creating jobs. However, this hypothesis may not hold true because the Pigouvian tax can exacerbate existing distortions in the labor market, making it difficult to achieve both environmental and economic goals simultaneously. For instance, a carbon tax may lead to job losses in the industries that emit more carbon, reduction in hours of work or wages, and shifts in the demand for labor across sectors. These effects can be particularly severe in markets where wages are inflexible or where workers lack the mobility to switch jobs. Therefore, the logic of the double-dividend hypothesis may not hold.

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