Pigouvian tax, Public Economics

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


Posted Date: 12/18/2012 6:16:50 AM | Location : United States

Related Discussions:- Pigouvian tax, Assignment Help, Ask Question on Pigouvian tax, Get Answer, Expert's Help, Pigouvian tax Discussions

Write discussion on Pigouvian tax
Your posts are moderated
Related Questions

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

Explain the stages and various coordination mechanism nvolved in policy processes

The major economies in the world are in a deep recession although there are some signs of growth. What implications has such a recession had for international business? How have go

Question 1: (a) Describe and distinguish between the Linear Stages Theory and the Structural Change Models. (b) What are the limitations of each of the above two models.

describe and illustrate the lm-schedule

Explain the stages and various coordination mechanisms involved in policy processes. Discuss various factors that influenced the agenda setting in policy processes

Question: Awards for excellent performance are increasingly employed within the public service in many countries. These will or will not have a financial value. Performance-rel

The State attempts to oversee, as exemplified by Art. 39 (b) and (c) of our Constitution, that private activities may not cause harm to the common good and in case they do so corre