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:

Indifference Curve

A graph showing different combinations of two goods that provide equal satisfaction and utility to a consumer.

Marginal Rates of Substitution

The speed at which a buyer is prepared to sacrifice one item for another while keeping their satisfaction constant.

Bads

Are items that people do not desire to have, opposite to goods, which have a negative impact on utility when consumed.

Indifference Curves

Graphical representations in microeconomics showing different bundles of goods between which a consumer is indifferent.