A Pigouvian tax is designed primarily to:
Correct answer: A. Make producers or consumers bear an external cost
- A. Make producers or consumers bear an external cost
- B. Provide a tax exemption for essential household goods
- C. Replace all direct taxes with indirect taxes
- D. Finance only the construction of public infrastructure
Explanation
A Pigouvian tax corrects a negative externality by making the decision maker face a cost imposed on others. A pollution charge is a common example because it can bring private and social costs closer together.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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