It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment.Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?

A) levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources
B) levy a Pigovian tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products
C) levy a Pigovian tax on the producers of electricity and use the tax revenues to clean up the river
D) levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river

Question

Mariana Fonseca · Accepted Answer

Final Answer : D, Explanation :  A Pigovian tax is designed to correct the negative externalities of a market activity. In this case, the paper mills are creating a negative externality by polluting the river, which affects the hydroelectric power plants downstream. Levying a Pigovian tax on the producers of paper products directly addresses the source of the pollution and uses the revenues to mitigate its effects, making it the most appropriate policy.

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