6. Pigouvian Taxes Flashcards
(16 cards)
What is a pigouvian tax?
A tax on activities that create a negative externality
What are should a Pigouvian tax be set?
At the same size as the externality
Why should a Pigouvian tax be set at the level it is?
If the tax is equal to the external damage of the pollution then firms and consumers have an incentive to choose the efficient level of output to internalise the externality
At what point do firms produce until under a Pigouvian tax?
MSC = MPC + tax
Where is the efficient outcome in this case?
SMC = PMB
Does it matter who pays the tax? Why?
No it doesn’t only thing it affects is the transaction costs
What does the economic incidence of the tax depend on?
The supply and demand elasticities
Why are producers typically get taxed?
Because transaction costs make it less-costly to apply tax where it is easier to measure emissions
When do customers bear more of the incidence?
When demand is elastic or supply is more elastic
What is carbon leakage?
Where a policy reduces emissions in one jurisdiction but causes an offsetting increase in emissions in another jurisdiction
What is a dounside of a pigouvian tax?
It may cause carbon leakage
What is the double dividend from a pigouvian tax?
Removes deadweight loss unlike other taxes and raises revenue to reduce DWL of other taxes
Do Pigouvian taxes satisfy the equimarginal principle?
Yes
Why do Pigouvian subsidies not work in the long run?
Because a subsidy lowers average costs leading to the entry of new firms
What is an alternative to Pigouvian subsidies?
Make less-polluting technologies cheaper
When does it become difficult to determine where to set the Pigouvian tax?
If you are uncertain about the marginal savings or marginal damages from pollution
