Which outcome is most likely when a government imposes a tax on an activity that creates pollution?
Correct answer: B. The social cost is brought closer to the private cost
- A. The private cost becomes lower than before
- B. The social cost is brought closer to the private cost
- C. The quantity of pollution must become zero
- D. The market price becomes legally fixed
Explanation
A pollution tax is intended to make producers or consumers consider the external cost imposed on society. It can bring private decision-making closer to the full social cost, although it does not necessarily eliminate pollution completely.
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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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