ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A government introduces a tax on each tonne of carbon emitted by manufacturers, set equal to the estimated external cost of the emissions. What is the main economic purpose of this tax?
The main purpose is to internalise the external cost, making producers bear the cost of the pollution they cause so that their private costs move closer to the true social cost. This should reduce output and emissions towards a more efficient level.
- ATo internalise the external cost so that producers bear itCorrect
- BTo raise demand for the manufacturers' products
- CTo remove all competition from the market
- DTo reduce the private costs of production
Explanation
A tax equal to the external cost makes producers include the social cost in their decisions, which is internalising the externality. It increases, not reduces, private costs, and it is not aimed at boosting demand or limiting competition.
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