What would socially efficient pigouvian tax on the emission

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Case Study: In this question we will combine a very simplified model of an externality that has long-lasting impacts with the model of discounted utility that we learned in our game theory topic. Consider a hypothetical environmental externality: produced as the byproduct of industrial activity, each unit of emission of a pollutant that is emitted once, today, causes $10 of external harm to society each and every year, starting immediately, forever. Let's say that policymakers apply a discount factor of δ ∈ (0, 1) to future gains and losses, in an analog of the discounted utility model except for cash payoffs rather than utilities.

Question: What would the socially efficient Pigouvian tax on the emission of this pollutant be if we applied a discount factor of (i) δ = 0.5, (ii) δ = 0.9, and (iii) δ = 0.99? Give an intuitive explanation of how to interpret the parameter δ in this context, and explain precisely but in simple terms what the goal and effect of the Pigouvian tax would be.

Reference no: EM133340753

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