What are Pigouvian taxes and subsidies? How do governments decide when to levy a tax or provide a subsidy?
What will be an ideal response?
Governments address externalities through Pigouvian taxes or subsidies, named after the economist Arthur Pigou. Taxes and subsidies are levied to ensure that firms internalize externalities. Consider a good with negative externalities. The marginal social cost of the good is greater than its marginal private cost. The government will levy a tax on the good, which is equal to the external cost of the good. This tax makes firms take into account the external damage from the good when it makes its production decisions. Similarly, for a good with positive externalities, the government provides a subsidy to a firm or consumer that is equal to the external benefits from the good. The Pigouvian subsidy raises the individual's marginal benefits of consumption by an amount equal to the external benefits its consumption causes, exactly aligning the individual's benefits with society's benefits.
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Many communities use a mixed-flow recycling program in which various types of bottles, cans, and other containers are placed in a single recycling bin
Suppose a community alters its recycling program by mandating that the containers must be sorted by type of material (i.e., glass, aluminum, plastic). What is the expected impact of this change on the optimal quantity of unredeemed (scrapped) containers? A) Optimal quantity increases B) Optimal quantity decreases C) Optimal quantity remains unchanged D) We cannot determine the outcome of this policy change without having more information
If the price of gasoline goes up, and Jacob now buys fewer candy bars because he has to spend more on gas, this would best be explained by
a. the substitution effect. b. the income effect. c. the highly elastic demand for gasoline. d. all of the above.