A Pigouvian Tax

question 146

Multiple Choice

A Pigouvian tax:

• A) is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
• B) subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
• C) is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss.
• D) is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.

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Definitions:

Lump Sum

A single payment made at a particular time, as opposed to several smaller installments.

Future Value

The value of an investment at a specified date in the future that accounts for a specified rate of interest or rate of return.

Interest Rate

The amount charged by a lender to a borrower for the use of assets expressed as a percentage of the principal.

Trust Fund

A legal entity set up to hold property or assets for the benefit of another party, often managed by a trustee.