Final answer:
Corrective taxation is ideally employed to address negative externalities, such as pollution, by aligning private costs with social costs and mitigating market failures.
Step-by-step explanation:
Corrective taxation is best used when there is a negative externality. A negative externality occurs when the production or consumption of a good or service imposes a cost on third parties. An example of a negative externality is pollution from a factory that affects the health and environment of the surrounding community. Corrective taxes, like a pollution tax, are intended to make the producer or consumer of the good take into account the external costs they are creating. This aligns the private cost with the social cost, leading producers to reduce pollution and move towards the social optimum.
Positive externalities, such as the benefits enjoyed by a bird watcher when a neighbor plants a garden that attracts birds, are typically addressed through subsidies rather than taxation. Perfect competition and monopolies are market structures that relate to other aspects of economic policy, not directly to corrective taxation.
Firms can contribute to market failure when they produce negative externalities and don't take the social costs into account, resulting in overproduction of harmful goods. Corrective taxation aims to mitigate this market failure by internalizing the external costs.