Government regulators want to limit pesticide runoff to its efficient level. Unfortunately, government regulators are uncertain how marginal abatement costs behave with changes in runoff; fortunately, they do know that marginal abatement costs are less sensitive to changes in runoff than marginal costs of pollution. In this situation, the use of a _____ leads to a smaller deadweight loss than a _____.
A) quota; Pigouvian tax
B) quota; quantity restriction
C) Pigouvian tax; quantity restriction
D) Pigouvian subsidy; Pigouvian tax

Question

Quizplus · Accepted Answer

A Pigouvian tax is more efficient than a quantity restriction in this scenario because it allows for flexibility in adjusting to the actual costs of abatement and pollution. Since marginal abatement costs are less sensitive to changes in runoff than the marginal costs of pollution, a Pigouvian tax, which directly taxes the act of pollution, can better align with the actual costs and benefits of reducing pollution, leading to a smaller deadweight loss compared to a rigid quantity restriction.

Government Regulators Want to Limit Pesticide Runoff to Its Efficient