Taxes imposed on polluting firms,for internalizing the externalities created by them,may not always lead to an efficient solution because:
A)the taxes lowers the firms' incentives to reduce pollution
B)it is difficult to determine the appropriate level of the tax that will result in an efficient output.
C)firms that cannot earn positive economic profits after the tax is imposed will go out of business.
D)the tax imposed by the government results in an increase in the average price level.

Question

Quizplus · Accepted Answer

It is difficult to determine the appropriate level of tax to impose on polluting firms to ensure an efficient output. If the tax is set too high, it may lead to the closure of firms that could have contributed positively to the economy or lead to an increase in the price level. On the other hand, if the tax is set too low, it may not deter firms from polluting the environment, leading to increased social costs. Additionally, the taxes may lower the firms' incentives to reduce pollution, leading to suboptimal outcomes.

Taxes Imposed on Polluting Firms,for Internalizing the Externalities Created by Them,may