Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain.This is an example of
A)a transactions cost.
B)a Pigovian tax.
C)a Pigovian subsidy.
D)the Coase Theorem.

Question

Quizplus · Accepted Answer

This is a classic example of a Pigovian tax, which is a tax imposed on a producer that creates negative externalities, in this case, acid rain. The tax is designed to internalize the cost of the externality on society, encouraging the producer to reduce their emissions and mitigate the effects of the pollution. Option A, transactions cost, refers to the cost associated with conducting a transaction between two parties. Option C, Pigovian subsidy, is a subsidy that is given to a producer to encourage them to produce a good that creates positive externalities. The Coase Theorem, Option D, states that in the presence of well-defined property rights and low transaction costs, parties will negotiate to reach an efficient outcome without the need for government intervention. This scenario involves government intervention in the form of a tax, so it is not an example of the Coase Theorem.

Assume That Production from an Electric Utility Caused Acid Rain