What effect would a tax equal to the external cost on firms that emit pollutants have?
A) It would provide firms with very little incentive to become eco-friendly.
B) It would provide firms with little incentive to search for less environmentally damaging production methods.
C) It would provide firms with the incentive to decrease the level of activity creating the pollution.
D) It would provide firms with the incentive to slightly increase the level of activity creating the pollution to cover the costs of the tax.

Question

Quizplus · Accepted Answer

A tax equal to the external cost on firms that emit pollutants would increase their cost of production, which would give them an incentive to decrease their level of pollution. This would either be achieved by decreasing the level of activity causing pollution or investing in less environmentally damaging production methods. Choice A, B, and D are incorrect as they do not accurately capture the incentive effects of such a tax.

What Effect Would a Tax Equal to the External Cost