Comparing Externality Correction Policies
A firm's production process imposes a negative externality on a nearby community. A policymaker is considering two different approaches to address this, both designed to reduce the firm's profits by an identical amount. The first approach is a tax on the firm's output, with the revenue collected by the government. The second approach is a requirement for the firm to directly pay the community for the damages caused. From the perspective of the firm, how do these two policies compare? From the perspective of the community and the government, how do they differ?
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Comparing Externality Correction Policies
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