What is the primary economic purpose of a Pigouvian tax?
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Get StartedWhat is the primary economic purpose of a Pigouvian tax?
Options:
- Raise general government revenue
- Correct negative externalities by aligning private and social costs
- Subsidize goods with positive externalities
- Compensate producers for fixed costs
Correct answer: Correct negative externalities by aligning private and social costs
Explanation: A Pigouvian tax internalizes a negative externality by setting the tax equal to the marginal external cost at the socially optimal output; Arthur Pigou formalized this corrective mechanism in his 1920 work.
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