How does a Pigou tax work? Why might a Pigou tax fail to achieve an efficient outcome?
What will be an ideal response?
A Pigou tax serves as a proxy for external costs that are not considered by a market participant. Ideally, the Pigou tax raises the participant's private marginal cost so that it equals the social marginal cost, resulting in an efficient outcome. However, if there are no transactions costs, the involved parties can use private bargaining to achieve an efficient outcome, making a Pigou tax irrelevant. (In fact, if the recipients of the tax revenue are unable to enter the bargaining, then the Pigou tax can actually lower economic efficiency.) If transactions costs are present, a Pigou tax will fail to achieve an efficient outcome unless the taxed party is also the party possessing the least-cost solution to the externality problem.
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An increase in Todd's wealth from $2 million to $4 million raises his utility from 400 units to 500 units. If he has a utility of wealth curve with the typical shape showing risk aversion, then with a wealth of $6 million his utility might be
A) 500 units. B) 570 units. C) 600 units. D) 620 units.
Holding everything else constant, an increase in the price of raisins will result in
A) an increase in the quantity of raisins demanded. B) a decrease in the quantity of raisins demanded. C) an increase in the demand for raisins. D) a decrease in the supply of raisins.
All consumption bundles along a given indifference curve are equally desirable
Indicate whether the statement is true or false
Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel
A) balance sheet B) bank lending C) cash flow D) unanticipated price level