Suppose the government mandates that businesses pay a pollution tax if they keep using an old technology that is pollution intensive. Does the size of government increase when measured by its annual expenditures?

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BlackTom AI · Accepted Answer

The question asks us to assess whether the size of government, as measured by annual expenditures, increases when a pollution tax is imposed on old, polluting technology.
Option 1: 'Yes but only if the government decides to use this tax revenue to subsidize adoption of a greener technology.' This is a nuanced and accurate way to view government size. If the government collects a pollution tax (increasing revenue) and then spends that revenue, for example by subsidizing greener technology, it raises outlays and thus the measured size of government grows. If the revenue is merely kept as idle funds or used in non-spending ways, the expenditure measure may not rise. The key point is that expenditure increases occur when revenue is recycled into government spending, not merely due to taxation in isolation.
Option 2: 'Yes but only if some businesses keep using that old technology.' The use by businesses of the old technology has no direct bearing on the government's expenditure size. The size metric hinges on how much the government spends, not on private technology choices, so this statement confuses private behavior with fiscal outlays.
Option 3: 'Yes, it would have to.' This is too strong a claim. The government does not automatically have to increase expenditures simply because it levies a tax. It could use the revenue for other purposes, reduce other taxes, or reduce deficits without necessarily raising measured expenditures. Fiscal behavior varies by policy choices.
Option 4: 'No since government would keep this revenue as profit.' Governments are not profit-seeking entities in the same way as private firms; revenue collected is generally a budgetary resource that is allocated or spent. Treating the revenue as profit mischaracterizes how government budgets work and ignores the expenditure side of the equation. Moreover, even if revenue is saved or earmarked for future use, the standard measure of government size focuses on current-year outlays, not profits.

Suppose the government mandates that businesses pay a pollution tax if they keep using an old technology that is pollution intensive. Does the size of government increase when measured by its annual expenditures?

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