Question

A Pigouvian tax works by...

Select one:

a. Forcing producers to pay a tax per unit of production equal to the difference between marginal social cost and marginal private cost at the producer's profit maximising level of production

b. Forcing the producers to pay compensation equal to the external cost imposed upon society

c. Increasing the price consumers pay, forcing them to consume an amount equal to the socially optimal level

d. Forcing the producer to pay a tax per unit of production equal to the difference between the marginal social cost and marginal private cost at the socially optimal level of production

Answer 1

Here , the answer will be

( A)Forcing producers to pay a tax per unit of production equal to the difference between marginal social cost and marginal private cost at the producer's profit maximising level of production

Because for socially optimal level MPC=MSC

AND about pigovian tax,

A Pigovian tax is a tax on any market activity that generates negative externalities. The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the external marginal cost of the negative externalities. Social cost include private cost and external cost.