What economic effect is achieved by imposing a Pigovian pollution tax?
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Answer: C. Sets the price of pollution
Explanation
A Pigovian tax establishes a fixed price per unit of pollution emitted. Firms decide how much pollution to produce based on this imposed tax cost. Market forces then determine the total aggregate quantity of pollution released. Arthur Pigou proposed taxing negative externalities to align private and social costs. Environmental economists favor market-based instruments over rigid command-and-control regulations. Taxing emissions provides continuous financial incentives for companies to reduce pollution.
Carbon taxes are implemented globally to price greenhouse gas emissions effectively. Factories invest in cleaner technology when pollution taxes make emissions too expensive. Governments generate public revenue while simultaneously addressing environmental degradation. Setting pollution quantities directly describes cap-and-trade quota systems rather than taxes. Pigovian taxes actually increase incentives for technological innovations to reduce pollution. Determining demand for rights relates to permit trading markets rather than fixed taxes.
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