A Pigovian tax is intended to:
A) counter the effect of a negative externality.
B) decrease efficiency in a market.
C) decrease total surplus in a market.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

A Pigovian tax is a tax imposed on an economic activity that generates negative externality, such as pollution or traffic congestion. It is intended to make the producer of the negative externality pay for some or all of the costs imposed on others, in order to create a more socially efficient outcome. Thus, the correct answer is A. B and C are incorrect because a Pigovian tax is intended to increase efficiency and total surplus in a market by internalizing external costs, not decrease them.

A Pigovian Tax Is Intended To