What is the main practical difficulty in setting a tax to correct a negative externality?

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Question

What is the main practical difficulty in setting a tax to correct a negative externality?

Accepted Answer

The correct tax equals the external cost, which can be estimated but not precisely measured — Award 1 mark. Acknowledging this is an information problem, rather than treating the correct tax as computable, strengthens an answer considerably.

Answer

The tax must be approved by the firms being taxed

Answer

The correct tax equals the external cost, which can be estimated but not precisely measured

Answer

Firms will relocate rather than pay any tax

Answer

Taxes are always passed on to consumers in full

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