In the context of public economics, 'Pigouvian Taxes' are designed to:
A. Only redistribute income
B. Subsidise positive externalities only
C. Internalise negative externalities by setting the tax equal to marginal external cost
D. Raise revenue without affecting behaviour
Answer: Option C
Solution (By JKSSB Mock Tests)
A Pigouvian tax is levied on an activity that generates a negative externality and is set equal to the marginal external damage at the socially optimal quantity, thereby aligning private and social costs.
Explanation:
Moral hazard occurs when one party takes more risks because another party bears the cost, typically after a contract (e.g., insurance) is in place. Adverse selection occurs before the contract.
Explanation:
Automatic stabilisers are elements of the fiscal system—progressive taxes and unemployment benefits—that automatically reduce the amplitude of business-cycle fluctuations without the need for new legislation.
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