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The Pigovian taxes are non-distortionary. For example imagine situation where government optimal spending is 100e and before Pigovian tax all 100e was raised through income tax which creates distortions on Labour market. Let’s say that after imposing Pigovian tax government gets additional 30e. Now since government needs only 100e for its optimal spending it ...
5
The first order condition for individual $a$ when the price of $y$ equals $p_y(1+t)$ is given by:
$$
\frac{\partial u_a}{\partial y_a} = p_y(1+t) \left(\frac{1}{p_x} \frac{\partial u_a}{\partial x_a} \right)
$$
Rewriting the first order condition for the social equilibrium gives:
$$
\frac{\partial u_a}{\partial y_a} = p_y\left[1 + \left(\frac{p_x}{p_y} \...
4
An aspect of the matter could be described as follows:
We want
prompt replacement of (existing) fixed capital
because, I guess, it creates currently "unacceptable" levels of negative externalities, and we know better than to think that through the pricing of the externalities we will be able to reverse the damages, and all swell.
From this point of ...
3
No, taxing externalities is not a good substitute for VAT for several reasons.
Pigovian taxes (taxes on externalities) have to be set up in an optimal way to actually reduce externalities. However, it is astronomically improbable that the same level of tax that mitigates the negative externality is exactly the same level that government has to raise for ...
3
Prominent economist Greg Mankiw has been a prominent advocate of the kind of change you describe (he invites people to join "The Pigou Club", named for Arthur Pigou who first proposed these kinds of corrective taxes).
You can find a nice, non-technical summary of his arguments here. In particular, Makiw deals with some of the weaknesses you identify above ...
3
There is a vast literature in both economics and marketing on advertising. Some highlights relevant to your specific question:
A classic paper (Grossman and Shapiro 1984) looks at competitive advertising and indeed finds that advertisers tend to send too many ads. Intuitively, some customers attracted by an ad aren't new demand, but rather simply stolen ...
3
If negative externalities are priced into the market via a pigouvian tax, then those responsible for the negative externalities pay.
As a whole, the public is better off. Firstly because the market will now move to a more efficient situation, and the amount of negative externality will decrease (assuming something other than perfect inelasticity). And ...
2
In the given scenario, the optimal social outcome from a Coasian bargain is not in general the same as the optimal social outcome from a Pigouvian tax, although there is a special case in which this is so.
The scenario outlined in this question has several features that make it rather more complicated than some textbook discussions of policy towards negative ...
2
I think it's broadly a good idea; but as you've asked specifically for the downsides, here you are:
Having a steadily increasing carbon tax can actually accelerate the rate of investment in fossil fuel extraction, thus strengthening that lobby. That's because, with forward visibility of higher future carbon prices, it's better to extract now than in a ...
2
This should probably be a comment, but it's too long so I am posting it as an answer.
I'm not sure I necessarily agree with "[A Pigouvian tax] is a fixed unit price, which cannot be efficient if the damage costs are highly non-linear." But I do definitely agree with the fact that non-linearity causes practical problems for a Pigovian implementation, as I ...
2
A pigouvian tax is on goods or services that are known to have negative externalities, and for which some estimation of the economic value of those negative externalities can be made, and is there to correct the market failure. Its goal is to improve economic efficiency.
A sin tax is on goods or services judged to be morally negative. Its goal is to reduce ...
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I think the answer is generally/overwhelmingly "no" there usually not a embedded carbon (import) tax in most jurisdictions. A 2019 paper says:
The idea of a BCA is not new. In the US, for example, lawmakers have tabled several proposals to introduce a carbon tax. So far, though, no country in the world has an operational BCA.
Supposedly the EU Green ...
1
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.
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