How do Pigouvian taxes help in reducing pollution?
What will be an ideal response?
Pollution is an example of a negative externality in that it imposes costs on people otherthan those causing the pollution. In such a case, the social marginal cost of producingthe good that causes pollution exceeds its private marginal cost by the amount of thenegative externality, causing the good to be overproduced. A Pigouvian tax on the good canbe used to reduce the amount of pollution by forcing firms to internalize the cost to societyfrom their pollution. The tax is the difference between marginal social cost and marginalprivate cost; such a tax would reduce the quantity of the good produced to the sociallyoptimal level.
A-head: ECONOMICS OF THE ENVIRONMENT
Concept:Pigouvian taxes
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Suppose a firm uses labor and capital to produce output. The last unit of labor hired has a marginal product of 12 units of output, and the last unit of capital employed has a marginal product of 20 units
Use the optimal combination of inputs rule to calculate the price of capital if the price of labor is $6 per unit. The price of capital is A) $2. B) $10. C) $20. D) impossible to determine with the information given.
The demand for an input will be more inelastic when
A) the demand for the product being produced is elastic. B) the cost of the input is a relatively large percentage of total production costs. C) the time period being considered is relatively long. D) it is difficult to substitute other inputs for this input.