Achieving lower pollution Suppose the government decides to raise the gasoline t

Question

Achieving lower pollution Suppose the government decides to raise the gasoline tax as a way to reduce 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 bring the allocation of resources closer to the social optimum and, thus, improve economic efficiency. 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 be used only to alleviate pollution. Other taxes get passed on from businesses to consumers, whereas corrective taxes do not.

Explanation / Answer

Answer is Corrective taxes bring the allocation of resources closer to the social optimum and, thus, improve economic efficiency.

A corrective tax is a market-based policy option used by the government to address the negative externality. Levitation of gasoline tax increases the cost of producing good that generate externality, thus encouraging firms to produce less output.

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