6 - I. Pigouvian Taxation Pigouvian tax A tax levied on...

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I. Pigouvian Taxation Pigouvian tax – A tax levied on each unit of a polluter’s output in an amount equal to the marginal damage that it inflicts at the efficient level of production. o The goal is to set the tax so that the polluter incorporates the social cost. Note that Pigouvian taxation is a second-best solution, as we’ve taxed the output. It would be better to tax the pollution directly. Modern economic solutions to pollution, which we will discuss later, take this into account. o It is a second-best solution because, although the level of output is correct for the technology being used, the firm doesn’t have the correct incentives to use the appropriate technology (e.g. pollution control, more efficient machines, etc.) because there is no price placed on pollution. o However, there may be times when this is the best we can do. For example, we cannot measure the actual emissions from cars, so we instead tax gasoline consumption, since pollution is a by-product of
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This note was uploaded on 04/05/2012 for the course ECON 332 taught by Professor Hilarysigman during the Fall '11 term at Rutgers.

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6 - I. Pigouvian Taxation Pigouvian tax A tax levied on...

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