The effect of a tax to offset a negative externality will be to ____ price and ______ quantity?
Correct answer: C. increase, reduce
- A. reduce , reduce
- B. increase, increase
- C. increase, reduce
- D. reduce, increase
Explanation
A corrective tax raises the cost of producing or consuming the activity, increasing the price paid by buyers and reducing the equilibrium quantity. This discourages the activity that creates the negative externality.
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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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