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

Why does government undertake an economic activity, Q. Why does government ...

Q. Why does government undertake an economic activity? If ever an activity has large externality or spill over and includes a large number of people, it may be found better th

Study guide for Magruder''s American Government, study guide for Magruder''...

study guide for Magruder''s American Government. the tests are supper hard

Planing, In planning activities how are the decision arrived? what are the ...

In planning activities how are the decision arrived? what are the different stages of analysis? which factors can be ignored and why? state the manner in which a degree of success

Summary of valuation of environment, Normal 0 false false f...

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

Affirmative action and anticorruption programme, A change in the legal stat...

A change in the legal statute may be able to force an equilibrium if it leads to a new equilibrium which implies some revised belief which sustains the equilibrium. Tirole (1996)

Health economics, why is it important to consider the complex nature of hea...

why is it important to consider the complex nature of health and health care when examining economic principles related to health care delivery?

Examine essential elements of modern democratic societies, Question 1: ...

Question 1: Examine the essential elements of modern democratic societies. Question 2: State the various ways in which the participation of people is achieved in a demo

Long run demand and factor substitutability, Suppose there are two inputs i...

Suppose there are two inputs in the production function, labor (L) and capital (K), which can be combined to produce Y units of output according to the following production functio

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