Emissions taxes help to achieve the efficient level of production by forcing firms to bear the cost of pollution.

Question

Quizplus · Accepted Answer

Emissions taxes are designed to make firms internalize the cost of their pollution, thereby incentivizing them to reduce their emissions to the socially optimal level. By imposing a price on pollution, firms will be forced to consider the environmental costs of their production decisions, and will therefore make choices that minimize those costs. This helps ensure that production occurs at the efficient level, where the marginal social cost of production is equal to the marginal social benefit. In this way, emissions taxes can help to correct for the market failure that results from firms not taking into account the full social cost of their production activities.

Emissions Taxes Help to Achieve the Efficient Level of Production