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A Pigovian tax is a tax levied to correct the negative externalities of an activity. For instance, a Pigovian tax may be levied on producers who pollute the environment to encourage them to reduce pollution, and to provide revenue which may be used to counteract the negative effects of the pollution. Certain types of Pigovian taxes are sometimes referred to as sin taxes, for example taxes on alcohol and cigarettes. A tax (also known as a duty, or Zakat in Islamic economics) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ...
A Sin tax is a euphemism for a tax specifically levied on certain generally socially-proscribed goods - usually alcohol and tobacco. ...
In chemistry, an alcohol is any organic compound in which a hydroxyl group (-OH) is bound to a carbon atom of an alkyl or substituted alkyl group. ...
A lit cigarette A full ashtray. ...
Pigovian taxes are named after economist Arthur Pigou (1877-1959) who also developed the concept of economic externalities. An economist is an individual who studies, develops, and applies theories and concepts from economics, and writes about economic policy. ...
Arthur Cecil Pigou (November 18, 1877 _ March 7, 1959) was an English economist, known for his work in many fields and particularly in welfare economics. ...
An externality is the effect of a transaction between two individuals and a third party who is not concerned to, or played any role in the carrying out of that transaction (Milton Friedman). ...
Workings of Pigovian tax
 Pigovian Taxes. See Workings of Pigovian tax for explanation. The diagram to the right illustrates the working of a Pigovian tax. (For an explanation of this type of diagram, see the social cost article.) A tax shifts the marginal private cost curve (MPC) up by the amount of the tax (to MPC + T). Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level (Qs), so that the tax will tend to reduce the amount of the externality. The total government revenue from the tax (which is available to be used to mitigate the effect of the negative externality) is equal to the area 0EAB. The profit to the firm is equal to the area EAF. social costs with pigovian taxes File links The following pages link to this file: Pigovian tax Categories: GFDL images ...
Social cost, in economics, is the total of all the costs associated with an economic activity. ...
A key problem with Pigovian tax is that of calculating what level of tax will counterbalance the negative externality. Political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax.
A Pigovian tax is considered one of the "traditional" means of bringing a modicum of market forces, and thus better market efficiency, to economic situations where externality problems exist. More recently, particularly in the United States since the late 1970's, and in other developed nations since the 1980's, an alternative to Pigovian taxation has arisen: the creation of a market for "pollution rights." Pollution rights markets are not generally more efficient than Pigovian taxes but are often more appealing to policy makers because giving out the rights for free (or at less than market price) allows polluters to lose less profits or even gain profits (by selling their rights) relative to the unaltered market case. Markets for emissions trading have been set up to bring better allocative efficiency and improved information sharing to the pollution externality problem. Pollution rights markets are a part of the field of Environmental Economics generally, and Free-market environmentalism specifically. An externality is the effect of a transaction between two individuals and a third party who is not concerned to, or played any role in the carrying out of that transaction (Milton Friedman). ...
Emissions trading is an administrative approach used to reduce the cost of pollution control by providing economic incentives for achieving reductions in the emissions of pollutants. ...
Environmental economics is a subfield of economics concerned with environmental issues (other usages of the term are not uncommon). ...
Free market environmentalism is an ideology that argues the free market is the best tool to preserve the health and sustainability of the environment. ...
Pollution taxes One argument that has been put forward against the levying of Pigovian pollution taxes is that if the tax is too high it will lead to a level of pollution that is less than the social optimum. The alternative, regulation, is viewed as having a higher cost to society because Pigovian taxes raise revenue and respond automatically to changes in the market such as lowered cost of production or pollution mitigation. With a Pigovian tax there is always an incentive to reduce pollution, whereas with direct regulation, a polluting company has no incentive to pollute any less than what is allowable.
Economic theory predicts that in an economy where the cost of reaching mutual agreement between parties is high, and where pollution is diffuse, Pigovian taxes will be an efficient way to promote the public interest, and will lead to an improvement of the quality of life measured by the Genuine Progress Indicator and other human economic indicators, as well as higher Gross domestic product (GDP) growth. Water pollution Pollution is the release of environmental contaminants. ...
The Genuine Progress Indicator (GPI) is a concept in green economics and welfare economics that has been suggested as a replacement metric for gross domestic product (GDP) as a metric of economic growth. ...
A regions gross domestic product, or GDP, is one of several measures of the size of its economy. ...
Economic theory predicts that, under certain conditions, a double dividend could appear. The first is the reduction of pollution. The second consists in the recycling of the government revenue from the green tax. If the government keeps its revenue constant, some other taxes have to be cut (see Green tax shift). If the government chooses to cut the most distortional taxes, the costs of the swap to green taxes could be negative. A green tax shift is a fiscal policy which lowers the taxes on income including wages and profit, and raises taxes on consumption, particularly the unsustainable consumption of non-renewable resources. ...
Research on green taxation suggest that during the 1990s there was significant correlation between a country's UN Human Development Index (HDI) rank per fixed amount of GDP, and its level of green tax as a percentage of total tax revenues. Furthermore, over periods longer than 5 years, data suggest that countries having higher green tax rates such as Norway, Sweden and Netherlands experience higher GDP growth and higher HDI growth rate. The UN Human Development Index (HDI) measures poverty, literacy, education, life expectancy, and other factors. ...
Negative tax (subsidy) There also exists the concept of a subsidy, which can be considered a "negative Pigovian tax", to encourage certain behaviors with positive externalities (such as, say, starting a business in an underdeveloped area).
See also Social cost, in economics, is the total of all the costs associated with an economic activity. ...
In economics, carbon trading is a form of emissions trading that allows a country to meet its carbon dioxide emissions reduction commitments, often to meet Kyoto Treaty requirements, in as low a cost as possible by utilising the free market. ...
A Sin tax is a euphemism for a tax specifically levied on certain generally socially-proscribed goods - usually alcohol and tobacco. ...
References - N. Gregory Mankiw: Principles of Economics, Second edition, Harcourt College Publishers, 2001, page 216.
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