A Pigouvian tax on a polluting activity is intended to:
Correct answer: A. Make private marginal cost reflect external damage
- A. Make private marginal cost reflect external damage
- B. Raise output above the competitive level
- C. Remove all fixed costs from production
- D. Ensure that every firm earns positive profit
Explanation
A Pigouvian tax is set to reflect the marginal external cost imposed on others. By raising the producer's private marginal cost, it can bring the market outcome closer to the socially efficient level.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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