If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set
A)equal to the marginal external cost at the economically efficient level of pollution.
B)equal to the marginal private cost of production at the economically efficient level of pollution.
C)equal to the amount of the deadweight loss created in the absence of a pollution tax.
D)at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

Question

Quizplus · Accepted Answer

The pollution tax should be equal to the marginal external cost at the economically efficient level of pollution because this ensures that the polluter pays the full cost of their pollution and incentivizes them to reduce pollution to the socially optimal level. A tax equal to the marginal private cost would not take into account the external costs of pollution, while a tax set to cover deadweight loss would not necessarily correspond to the socially optimal level of pollution. The tax should also not be set too low, as this would not sufficiently incentivize producers to reduce pollution.

If Policymakers Use a Pollution Tax to Control Pollution, the Tax