If in an attempt to correct an externality the government sets a Pigouvian tax too high, the equilibrium quantity will be:
A) higher than the efficient quantity.
B) lower than the efficient quantity.
C) equal to the efficient quantity.
D) zero.

Question

Quizplus · Accepted Answer

If the Pigouvian tax is too high, it will increase the cost of production for the producer and reduce the quantity of the good that suppliers are willing to supply at any given price. As a result, the equilibrium quantity will be lower than the efficient quantity, leading to a deadweight loss. Therefore, the best choice is B.

If in an Attempt to Correct an Externality the Government