Taxes on external costs are unlike other taxes because they

Question

Quizplus · Accepted Answer

Taxes on external costs, also known as Pigovian taxes, are designed to internalize externalities by moving the allocation of resources closer to the social optimum. Unlike other taxes, they do not distort the incentives of the firms being taxed, as the tax is imposed based on the external costs they generate. While they do raise revenue for the government, the primary goal of Pigovian taxes is to correct for market failures caused by externalities, rather than to generate revenue. They may still result in a deadweight loss, but this is often smaller than that caused by other taxes, as they do not discourage economic activity or discourage investment.

Taxes on External Costs Are Unlike Other Taxes Because They