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    Question

    Explain the concept of the "Double Dividend Hypothesis"

    associated with a Pigouvian tax on pollution.
    A Pollution taxes lead to higher prices, benefiting both consumers and producers. Correct Answer Incorrect Answer
    B The pollution tax revenue is spent on environmental cleanup, yielding two benefits. Correct Answer Incorrect Answer
    C The tax simultaneously achieves the goal of reducing environmental pollution (the first dividend) and allows the government to reduce distortionary income/labor taxes (the second dividend). Correct Answer Incorrect Answer
    D Firms use the tax revenue to invest in cleaner technology, which increases profits twice. Correct Answer Incorrect Answer

    Solution

    Solution: The first dividend of the Pigouvian tax is the increase in economic efficiency resulting from the internalization of the negative externality (less pollution). The second dividend, the 'double' part, is achieved if the revenue generated from this tax is used to offset or reduce other, more distortionary taxes (like income or corporate taxes), thereby improving the overall efficiency of the tax system.

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