Question

An effort to reduce externalities, through taxation comparable to the cost of the damage caused by the externality is a/an:_______

Answer 1

Answer: A 3 : Pigouvian tax

Explanation:

A Pigovian tax is one that is introduced on companies producing a negative externality in the environment. The tax imposed is the cost of the damage caused by the negative externality.

Pigovian taxes are done in an effort to dissuade companies from producing negative externalities such as pollution by charging them the correct amount for the damage they cause so that it forces them to seek better methods of production that would reduce the externality.