I am constructing a diagram for an indirect tax (specific) imposed to correct a negative externality of consumption. enter image description here

There is a deadweight welfare loss from the externality (represented in blue) because, although it is reduced,the tax does not achieve to shift the supply curve to a point where MSB=MSC (Qm).

However, the tax itself also should produce a deadweight welfare loss (represented in green). Is it correct that there are two deadweight welfare losses in this situation or is there no deadweight welfare loss associated with a Pivogian tax?


2 Answers 2


The Pigovian tax is responsible for neither of the deadweight losses in your diagram.

The Pigovian tax has partially, but not wholly, corrected a deadweight loss that was caused by the negative externality.

There is a deadweight loss associated with Pigovian taxes: that is the administrative cost of collecting the tax. This is not pictured in your diagram.


I think the green DWL is correctly represented due to taxes however after taxes the MSB curve can itself shift to the right for example the reduction in cigarette consumption due to the tax leads to a decrease in the negative externalities generated by smoking further causing the MSB curve to shift to the right. The blue area comes under the producer's cost in the both cases I guess.

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