According to Pigovian analysis,when is a tax necessary to improve the market's economic efficiency?

Question

Quizplus · Accepted Answer

According to Pigovian analysis, a tax is necessary to improve the market's economic efficiency when there are negative externalities, which means that the social marginal cost of production exceeds the private marginal cost. A tax equal to the external cost can correct the market failure by internalizing the externality and making the producer pay for the social cost they impose on others. Therefore, option B is the correct answer. Option A is incorrect because high transaction costs do not necessarily require a tax, but rather, they may suggest the need for a third-party mediator or a more efficient allocation mechanism. Option C is incorrect because when there are positive externalities, a subsidy rather than a tax may be more appropriate to incentivize private provision of the good. Option D is incorrect because when the social marginal benefit of the good equals its social marginal cost, there is no market failure to correct and no need for a tax.

According to Pigovian Analysis,when Is a Tax Necessary to Improve