When control costs turn out to be less than expected, environmental policy based on
effluent taxes would allow waste discharges in excess of what is considered to be socially
optimal.

Question

When control costs turn out to be less than expected, environmental policy based on
 effluent taxes would allow waste discharges in excess of what is considered to be socially
 optimal.

Quizplus · Accepted Answer

Effluent taxes are designed to internalize the external costs of pollution, meaning they adjust the cost of discharging waste to reflect its social and environmental impacts. If control costs are lower than expected, firms have a stronger incentive to reduce pollution rather than pay the tax, leading to discharges that are closer to or even below the socially optimal level.

When Control Costs Turn Out to Be Less Than Expected