Pigouvian tax, Public Economics

Assignment Help:

Pigouvian Tax

An economic solution to the problem was evolved as early as in the 1920s by the well- known British economist Arthur Pigou in the form of pollution tax popularly known as Pigouvian tax. According to Pigou, the social damage or the social cost imposed by a firm by its pollution activity on society may be neutralised by imposing a pollution tax on the firm. The rate of the tax, according to him is equal to the marginal environmental cost or marginal social damage by the polluting firm on society.

We explain the situation in the below diagram where MCs, is the social marginal cost while MCp, is the private marginal cost of production of a good. As more output is produced, MCs, increases with the level of pollution. The demand for the pollution good is given by the demand curve DD' (representing marginal revenue curve, MR). As per market mechanism, the equilibrium output is q1 and price is P1 where MCp = MR. Socially optimum level of output, however, is q* and price P*, where MCS = MR. If the producer were made to pay for the social costs also, equilibrium output would have been at the level q*. We observe from below diagram that the difference between MCs, and MCp, at the socially optimum level output is 'ac'. In order to internalize the externalities Pigou suggests imposition of a tax t per unit of output where t = ac. Here it is assumed that pollution emitted per unit of output remains unchanged as level of output changes.

1890_Pigouvian Tax.png

Diagram: Pigouvian Tax

 


Related Discussions:- Pigouvian tax

Explain what is economic growth, Question 1: i. Explain the likely effe...

Question 1: i. Explain the likely effects of a recession on a government's budget? ii. How is the operation of fiscal policy supposed to affect the level of economic activ

Lm-schedule, describe and illustrate the lm-schedule

describe and illustrate the lm-schedule

Pollution expenditure accounting, Normal 0 false false fals...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Economics of Health Care, Deductibles and copayments are two common incenti...

Deductibles and copayments are two common incentive tools in insurance. (a)Explain which informational problems each tool primarily addresses. (b) If only one had to be used, indic

Areas of managing a crisis situation, Question: You are the Head of the...

Question: You are the Head of the Public Relations Department of an airline company. Your Chief Executive has asked you to make a presentation on crisis management to senior s

Discuss the forces impacting on good governance, Question: (a) There ap...

Question: (a) There appears to be an emerging consensus that the movement towards good governance must include initiatives to strengthen the institutions of government and civi

Created new understandings of urban leisure, How has public policy helped t...

How has public policy helped to shape the way that urban Americans have spent their leisure time throughout the period that we have examined in class? Have such policies hindered a

Capital accounting system, (1) The federal government is considering sellin...

(1) The federal government is considering selling tracts of federally owned land to private developers and using the revenues to provide aid to victims of an earthquake in a foreig

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd