Taxes on a firm's external costs
A) are designed to encourage more production.
B) are meant to force some firms out of business.
C) are simply meant to force decision makers to consider the full costs of their actions.
D) are designed primarily as a way to raise money so that the government can compensate the victims of the spillover.

Question

Quizplus · Accepted Answer

Taxes on a firm's external costs are meant to force decision makers to consider the full costs of their actions. It is a market-based solution to discourage firms from producing goods that generate negative externalities. The tax creates a cost for firms that is reflective of the true cost of their production, including the external costs imposed on society. This encourages the firm to reduce its negative impact on the environment or to invest in technology that reduces its pollution. The revenue generated from this tax can be used to compensate the victims of the spillovers or to fund environmental protection programs.

Taxes on a Firm's External Costs