The imposition of a Pigouvian tax will force the paper mill to ______________ its externality.

Question

Quizplus · Accepted Answer

A Pigouvian tax is a tax on a negative externality, such as pollution. By imposing this tax, the paper mill will need to pay a higher cost for the pollution it creates. This will increase the firm's private cost of production to a level that includes the social cost of pollution. As a result, the paper mill will be forced to internalize the negative externality it was creating and will be incentivized to reduce its pollution levels to avoid paying higher taxes. Therefore, the best choice is A) internalize.

The Imposition of a Pigouvian Tax Will Force the Paper