When the government uses corrective taxes to help a market deal with negative externalitites, which of the following are true? a

Marketing Dec 27, 2020

When the government uses corrective taxes to help a market deal with negative externalitites, which of the following are true?

a. Economists prefer corrective taxes to command and control policies.

b. Corrective taxes raise revenues for the government.

c. Corrective taxes will cause the quantity sold of a good to fall.

d. Corrective taxes actually enhance the efficiency of the market.

Expert Solution

The answer is option b, c, and d.

When a corrective tax is imposed on the production of a good or service that generates negative externality, it increases the tax revenue of the government. Due to the imposition of corrective tax, production reduces because private marginal cost increases. In presence of a negative externality socially optimal output cannot be generated, so a corrective tax is imposed to ensure social optimality.

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