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CA Foundation · Business Economics · Public Finance

A city municipal corporation introduces a congestion tax on vehicles entering the central business district during peak hours. The primary objective of this tax is to:

A congestion tax is a Pigouvian tax that corrects the negative externality of road congestion. By raising the private cost of vehicle usage during peak hours, it encourages drivers to internalize the external costs they impose on other road users, thereby reducing congestion to a more socially efficient level.

  1. AMaximize revenue generation for infrastructure development
  2. BCorrect a negative externality by increasing the private cost of vehicle usageCorrect
  3. CEnsure equitable distribution of wealth among city residents
  4. DProvide subsidies to public transportation operators

Explanation

A congestion tax is a corrective or Pigouvian tax designed to address the negative externality of traffic congestion—when one vehicle's presence imposes costs on other road users that the driver does not pay. By increasing the private cost to users, it internalizes the external cost and reduces quantity demanded to the socially optimal level. Revenue generation is incidental, not the primary goal; it is not about wealth distribution or subsidies.

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