1)Which of the following is not a market incentive to discourage pollution?

a. emission charges

b. higher user fees

c. regulatory intervention

d. green taxes

2)Suppose the government decides to raise the gasoline tax as a way to reduce air pollution and traffic congestion to their optimal levels. Describe why corrective taxes, such as the gasoline tax, are unlike other taxes.

1)Emission charges, regulatory intervention and green taxes all are incentives to discourage pollution because the make the firms accept liability for pollution. Higher user fees send costs of the pollution to the users and does not induce any regulation of the pollution with respect to the producers.

2)Corrective taxes are different than other taxes because they are meant to internalize externalities and bring the market to the socially optimal level of production. If there are negative externalities, such as pollution, associated with gasoline consumption than the traditional market equilibrium will lead to more gallons of gasoline (and more cars being used) than what is in society's best interest. If government knows the per unit cost of gasoline pollution, it can tax gasoline by this amount. This will incentivize consumers of gasoline to purchase less, causing the quantity of gasoline used to fall to what is socially optimal. Other taxes imposed by the government may not specifically target externalites, but may instead be used to increase government revenue.