Suppose the government decides to raise the gasoline tax as a way of reducing ai

Question

Suppose the government decides to raise the gasoline tax as a way of reducing air pollution and traffic congestion to their optimal levels. Which of the following describes why corrective taxes, such as the gasoline tax, are unlike most other taxes? Corrective taxes alter incentives, whereas other taxes typically do not. Other taxes are typically used to cover general spending, but funds from corrective taxes can only be used to alleviate pollution. Corrective taxes bring the allocation of resources closer to the social optimum, and thus improve economic efficiency. Other taxes get passed on from businesses to consumers, whereas corrective taxes do not.

Explanation / Answer

The answer is corrective taxes bring the allocation of resources closer to the social optimum, and thus improve economic efficiency.

There are multiple advantages of corrective taxes.

Coorective taxes provide incentives to reduce negative externalities. Due to gasoline taxes the cars will become more fuel efficient. Such taxes also raises revenue for government. This revenue can be spent on other alternatives to bring economic efficiency.

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