The purpose of a Pigouvian tax is to create the efficient level of production and consumption of ____________________________.

Question

A quasi public good when there is a negative external cost created as a byproduct of its production.

A private good when there is a negative external cost created as a byproduct of its production.

A common property resource when there is a negative external cost created as a byproduct of its production.

A public good when there is a negative external cost created as a byproduct of its production.

Answer 1

The purpose of a Pigouvian tax is to create the efficient level of production and consumption of a private good when there is a negative external cost created as a byproduct of its production.

Pigouvian taxes are designed to correct market failures that occur when the production or consumption of a good results in external costs that are not reflected in the market price, thereby leading to overproduction and overconsumption of goods that generate negative externalities.