Future Business Leader Achievments (FBLA) Economics Practice Exam

If private automobile owners were taxed based on their exhaust emissions, which is the probable outcome?

1. Automobile buyers would insist on truly effective smog-control devices.

2. Air pollution would be efficiently reduced.

3. The private cost of operating automobiles would fall.

4. The external cost of operating automobiles will rise.

The correct answer is: Air pollution would be efficiently reduced.

When private automobile owners are taxed based on their exhaust emissions, the probable outcome is that air pollution would be efficiently reduced. This approach is an example of an externality tax, which aims to internalize the external costs associated with pollution. By imposing a tax on emissions, vehicle owners would have a financial incentive to reduce their pollution levels, either by upgrading to cleaner vehicles or reducing driving frequency. As a result, this tax encourages consumers to consider the environmental impact of their choices more seriously, potentially leading to the development and adoption of cleaner technologies and alternatives. Over time, as more individuals and businesses respond to these financial incentives, the overall levels of air pollution are likely to decrease, showcasing a market-driven approach to addressing environmental concerns. This outcome aligns with economic theories regarding negative externalities, where imposing a cost on a polluting behavior leads to a more socially optimal level of production and consumption by reducing negative impacts on the environment.