Taxation may improve the social welfare when the taxed good
A)is socially undesirable (like, in some views, liquor and pornography).
B)imposes negative externalities.
C)is overproduced under a free-market system.
D)All of the above are correct.

Question

Taxation may improve the social welfare when the taxed good
A)is socially undesirable (like, in some views, liquor and pornography).
B)imposes negative externalities.
C)is overproduced under a free-market system.
D)All of the above are correct.

Quizplus · Accepted Answer

All of the choices given may validly justify taxation in order to improve social welfare. A socially undesirable good, such as liquor or pornography, may have negative effects on individuals and society as a whole, and therefore taxing it may discourage its consumption or production. Goods that impose negative externalities, such as pollution, may be underpriced in a free-market system, and taxation can help to account for the costs that are often borne by society. Finally, in cases where a good is overproduced in a free-market system (such as through a market failure), taxation can help to reduce the quantity of the good to a socially optimal level, improving overall welfare.

Taxation May Improve the Social Welfare When the Taxed Good