The Downside of Using a Tax to Target Specific Activities

question 20

Multiple Choice

The downside of using a tax to target specific activities, rather than the externality itself, is:

• A)it risks misaligning the incentives that producers and consumers face with the goal of minimizing the externality.
• B)it requires a number of different activities to be identified and several different policies to be written, which can be cumbersome and difficult to manage.
• C)any one activity is likely to not make a significant difference in the presence of an externality.
• D)All of these statements are true.

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Definitions:

Discouraged Workers

Individuals who are not actively seeking work because they believe no jobs are available for them or there are none for which they would qualify.

Unemployed

Refers to individuals who are without a job but are actively seeking work.

Contraction

The downturn of the business cycle, when real GDP is declining.

Recovery Phase

A period within the economic cycle where activity rebounds following a recession, characterized by increasing GDP, employment, and investment.