Pigovian taxes:
A)encourage consumers to avoid sales taxes by shopping online
B)are frequently used to encourage exports
C)are rarely preferred to direct regulation
D)give factory owners an economic incentive to reduce pollution

Question

Quizplus · Accepted Answer

Pigovian taxes are meant to internalize the external costs of a product or service, such as pollution caused by a factory. By imposing a tax on the factory's pollution, the owner now has an economic incentive to reduce the pollution, either by implementing cleaner technology or producing less. This can help society reach a socially optimal level of pollution. Choices A and B are incorrect as Pigovian taxes are not intended to address these issues. Choice C is partially correct, as direct regulation may be used in conjunction with Pigovian taxes, but Pigovian taxes can often be a preferred alternative to more cumbersome regulation.

Pigovian Taxes