Question

A country decides to impose a tax to reduce the external cost created by carbon emissions. Prior to the tax,____
and as a result of the tax,_____
A. marginal cost equals marginal benefit, marginal cost will be less than marginal benefit
B. there was no deadweight loss; a market failure occurs because taxes reduce production
C. market failure occurred; the deadweight loss is reduced
D. market failure occurred producer surplus will equal consumer surplus
E. producer surplus equals consumer surplus; marginal cost equals marginal benefit

Answer 1

Answer:

C. market failure occurred; the deadweight loss is reduced

Explanation:

Carbon emissions produce externalities: they affect others not involved in the transaction, in the form of pollution, or in the form of contributions to climate change. Externalities are a form of market failure because in this situation, the market fails to allocate resources in a way that produces the best social benefit (the Pareto Optimum).

To correct the externality, a tax is imposed, this type of tax is known as a Pigouvian tax. The Pigouvian tax reduces the deadweight loss caused by the externality.