Final answer:
b) Reducing the external costs.
A Pigouvian tax reduces the external costs associated with pollution by taxing polluting firms, encouraging them to either reduce pollution or pay the tax, thus internalizing the externality.
Step-by-step explanation:
A Pigouvian tax can address the problems of external costs by reducing the external costs. By imposing a tax that is equivalent to the negative externality, firms are faced with additional input costs, leading them to internalize these costs. When these firms face the full social marginal cost (MSC) as their costs, they will ideally choose the production quantity that aligns with the social optimum.
Pollution taxes encourage firms with lower abatement costs to reduce their pollution, while those with higher costs may opt to continue polluting and pay the imposed tax.
This form of taxation ensures that there are no special exceptions for politically well-connected producers and provides an incentive for all firms to seek out the least expensive technologies to mitigate pollution. This strategy is consistent with the principle of internalizing externalities and making polluters face the social cost of their actions.
A Pigouvian tax can address the problems of external costs by reducing the external costs. It is a type of tax imposed on goods or activities that create negative externalities, such as pollution.
By taxing these goods or activities, the government aims to internalize the external costs, making firms face the social cost of their actions.
This tax encourages firms to find the least expensive technologies for reducing pollution, as they will have an incentive to minimize their pollution taxes. Firms that can reduce pollution cheaply and easily will do so, while those that will incur high costs for reducing pollution will end up paying the pollution tax instead.