Question

If the government imposes a Pigouvian tax on the plant emitting harmful gases:

a) Production costs for the plant decrease.
b) Consumers benefit from lower prices.
c) The plant is discouraged from emitting harmful gases.
d) The plant receives a subsidy for its emissions.

Answer 1

A Pigouvian tax on a plant emitting harmful gases discourages emissions by increasing the cost of production for polluters, hence option (c) is correct. This tax is not a subsidy nor does it decrease production costs or lead to lower consumer prices.

Step-by-step explanation:

If the government imposes a Pigouvian tax on the plant emitting harmful gases, the correct answer is (c) The plant is discouraged from emitting harmful gases. A Pigouvian tax is designed to incentivize firms to reduce their harmful emissions by imposing additional costs for polluting. A firm that has to pay a pollution tax has an incentive to discover less expensive means for reducing pollution. If reductions can be done cheaply, the firm minimizes its pollution taxes, otherwise, it pays more in taxes.

Firms that find pollution reduction expensive will accordingly end up paying the pollution tax. This means the production costs for the plant actually increase, not decrease, directly contrasting option (a). As a result, consumer prices might rise rather than fall, refuting option (b). Finally, a Pigouvian tax is not a subsidy, so option (d) is also incorrect. A subsidy would mean that the government provides financial support to the firm, which is the opposite of a taxation mechanism designed to reduce pollution.