Which of the following is NOT an effective way to manage the inefficiency resulting from a negative externality?

Question

BlackTom AI · Accepted Answer

A lump-sum tax is a fixed payment that does not change marginal incentives, so it cannot correct the marginal distortion created by a negative externality.

1. Relevant knowledge points and concepts
- Negative externality: private marginal cost (PMC) < social marginal cost (SMC) because each unit imposes an external marginal cost (MEC) on others. SMC = PMC + MEC.
- Market equilibrium without intervention sets PMC = marginal benefit (MB), producing Qmarket > Q* (the socially efficient quantity).
- Effective corrective policies must change marginal incentives so that the private decisionmaker faces SMC rather than PMC (e.g., Pigovian tax t = MEC per unit).

2. Step-by-step reasoning
- Start with equilibrium conditions:
  - Market outcome: PMC(Qmarket) = MB(Qmarket).
  - Social optimum: SMC(Q*) = MB(Q*), where SMC = PMC + MEC.
- A Pigovian (per-unit) tax t = MEC shifts PMC upward to PMC + t, aligning private marginal cost with social marginal cost so the new market Q equals Q*.
- A lump-sum tax T is a fixed payment independent of the level of output or emissions. It shifts the firm’s total cost curve up but does not change marginal cost: for all Q, d(Total Cost)/dQ is unchanged.
- Because marginal cost is unchanged, the condition PMC = MB still holds at the same Qmarket. Thus the quantity (and associated externality) remains unchanged.

3. Intermediate “calculation” steps (symbolic)
- SMC = PMC + MEC.
- Market: choose Q such that PMC = MB.
- Pigovian tax t: PMC + t = MB ⇒ choose Q* where SMC = MB.
- Lump-sum tax T: PMC unchanged ⇒ PMC = MB at Qmarket (no change).

4. Why the correct answer is correct
- The essence of correcting externalities is altering marginal incentives; lump-sum taxes do not alter marginal decisions so they fail to reduce the inefficient overproduction caused by a negative externality.

5. Why other common options are effective (briefly)
- Pigovian (per-unit) taxes/internalization align private and social marginal costs.
- Tradable permits (cap-and-trade) limit total emissions to the efficient level.
- Quantity regulation or standards directly restrict harmful activity.
Each of these changes marginal incentives or quantities; lump-sum taxes do not.

6. Conclusion
- Therefore, “Lump-sum taxes” is NOT an effective way to manage inefficiency from a negative externality, confirming the provided answer.

Which of the following is NOT an effective way to manage the inefficiency resulting from a negative externality?单项选择题

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