When a Tax Is Imposed on a Market with a Negative

question 92

Multiple Choice

When a tax is imposed on a market with a negative externality, the market is:

• A)inefficient, because the net benefit of buying another unit is zero for all market participants.
• B)efficient, because the net benefit of buying another unit is zero for all market participants.
• C)efficient, because the government mandates the efficient quantity without regard for net benefits.
• D)inefficient, because the government mandates the tax without regard for net benefits.

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Definitions:

Futures Contract

A formal contract to purchase or sell a specific financial asset or commodity at an agreed-upon price on a future date.

Credit Risk

The risk of loss due to a borrower's inability to make payments on any type of debt.

Clearing Corporation

An entity that facilitates the settlement of transactions in the financial markets by ensuring the transfer of funds and securities.

Net Position

The difference between the total number of long and short positions that a trader or institution holds in a particular security, currency, or commodity.