Which statement accurately describes the revenue-raising argument for imposing Pigouvian taxes?

Which statement accurately describes the revenue-raising argument for imposing Pigouvian taxes?

• A. They reduce pollution only but not raise revenue.
• B. They subsidize production to internalize externalities.
• C. They distort markets without any revenue.
• D. They raise government revenue while correcting the externality.

Answer: (D)

Pigouvian taxes are designed to fix a negative externality by charging a per-unit cost equal to the external damage from pollution. When the tax equals the marginal external damage, the private cost faced by the firm plus the tax reflects the social cost, so firms cut back output to the socially optimal level. At the same time, the tax collects revenue for the government, creating a source of public funds. This revenue can be used to finance public goods or reduce other taxes, making the policy worthwhile beyond just reducing pollution. In other words, the tax corrects the externality while simultaneously raising government revenue, which is what this statement captures. subsidies or revenue-free schemes do not offer this combination, since subsidies encourage pollution and taxes do generate revenue.

Pigouvian taxes are designed to fix a negative externality by charging a per-unit cost equal to the external damage from pollution. When the tax equals the marginal external damage, the private cost faced by the firm plus the tax reflects the social cost, so firms cut back output to the socially optimal level. At the same time, the tax collects revenue for the government, creating a source of public funds. This revenue can be used to finance public goods or reduce other taxes, making the policy worthwhile beyond just reducing pollution. In other words, the tax corrects the externality while simultaneously raising government revenue, which is what this statement captures. subsidies or revenue-free schemes do not offer this combination, since subsidies encourage pollution and taxes do generate revenue.