A tax used to internalize an external cost is unlike most other taxes because it:
A)creates a deadweight loss.
B)moves the output level away from the socially optimal level.
C)drives the output level toward the socially optimal level.
D)distorts incentives.

Question

Quizplus · Accepted Answer

A tax used to internalize an external cost is designed to correct an externality by making producers pay for the social cost of their production. By doing so, it drives the output level toward the socially optimal level, which maximizes social welfare. This is not like most other taxes because it does not create a deadweight loss (as long as the tax rate equals the external cost), move the output level away from the socially optimal level, or distort incentives.

A Tax Used to Internalize an External Cost Is Unlike