If a tax is imposed on a negative externality, the tax should be

Question

Quizplus · Accepted Answer

The tax should be equal to the amount of the externality because this will internalize the cost of the negative externality into the market price, incentivizing producers and consumers to reduce their levels of pollution or other activities that create negative externalities. A tax that is less than the amount of the externality would not fully incentivize the reduction of the negative externality, and taxes that reduce demand or supply are not directly related to the external effect being addressed.

If a Tax Is Imposed on a Negative Externality, the Tax