In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution,the pollution tax must be set equal to the
A) marginal private cost.
B) marginal external cost.
C) marginal social cost.
D) marginal benefit of polluting.
E) price of the good.

Question

Quizplus · Accepted Answer

The pollution tax must be set equal to the marginal external cost, which is the cost imposed on society as a whole due to pollution. This ensures that the polluter pays for the full cost of their actions, including the negative externalities they create, and creates an incentive for them to reduce their pollution output to the socially optimal level. Setting the tax at marginal private cost (A) would not account for the external costs, setting it at marginal social cost (C) would result in no deadweight loss due to pollution, and setting it at the marginal benefit of polluting (D) would incentivize polluting rather than reducing it. The price of the good (E) is not relevant in determining the optimal pollution tax.

In Order for Pollution Taxes to Be Effective in Eliminating