Question

The _______________________ argument says that pollution taxes could not only reduce pollution, but could also reduce taxes on capital and labor, thus making the whole economy operate more efficiently.

Answer 1

Answer: double-dividend hypothesis

Explanation: The double dividend hypothesis is the theory that proposes that environmental taxes can improve the environment by reducing pollution and increase economic efficiency at the same time. This is because the use of environmental tax revenues can be channeled into reducing other taxes such as income taxes that deform labor supply and saving decisions. In other words, If the parties that are generating these negative benefits to others would be taxed heavily for these effects, they would have an incentive to reduce production of whatever is causing the negative externality.