The effect of a Pigovian tax on a market is:
A) increased price and reduced quantity to the efficient level.
B) decreased price and increased quantity to the efficient level.
C) increased price and quantity to the efficient level.
D) decreased price and quantity to the efficient level.

Question

Quizplus · Accepted Answer

A Pigovian tax is designed to address a market failure by taxing negative externalities, such as pollution, to incentivize firms to reduce their output to the efficient level where marginal social cost equals marginal social benefit. The tax raises the cost of production, pushing some producers out of the market and reducing the quantity supplied. This shift in supply leads to an increase in the market price, which reduces consumer demand and further reduces the quantity supplied until the efficient level is reached. Therefore, the effect of a Pigovian tax is increased price and reduced quantity to the efficient level.

The Effect of a Pigovian Tax on a Market Is