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 Pigovian taxes, such as gasoline tax, are unlike most other taxes?

 

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

 

Correct taxes alter incentives, whereas other taxes typically do not.

Answer 1

If government decides to raise the gasoline tax as a way of reducing air pollution and traffic congestion to their optimal levels, then Corrective taxes provide incentives to reduce negative externalities. Due to gasoline taxes the cars will become more fuel efficient. Such taxes also raise revenue for govemment.

Therefore, option B - Corrective taxes bring the allocation of resources closer to the social optimum, and thus improve economic efficiency is correct.