Explain how a Pigovian tax works. What will be an ideal ...

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Explain how a Pigovian tax works.
 
  What will be an ideal response?

Question 2

Under rate of return regulation, a natural monopoly ________.
 
  A) has an incentive to inflate its costs
  B) has an incentive to deflate its costs and capture more of the market
  C) makes an economic profit
  D) sets price equal to marginal cost

[Bigfoot1984]

Answer to Question 1

A Pigovian tax is a method of dealing with externalities. The government sets the tax rate equal to the marginal external cost, making polluting firms behave in the same way as they would if they bore the cost of the externality directly because their costs are the same as if they paid for the pollution directly. In this case, the amount of pollution is reduced to the efficient level.

Answer to Question 2

A

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Gracias!

[phuda]

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