Question

What determines whether a corrective tax or quantity regulation is a better choice for controlling an externality?

Answer 1

A corrective tax is more efficient then a restriction imposed on quantity. This is because the tax is going to reduce the deadweight loss of externalities more than the quantity restriction. also note that there is a revenue generated by the government when the tax is imposed. However in case of quantity regulation, consumer surplus is transferred to producer surplus and there is no generation of revenue. Due to this reason also, corrective tax is more efficient