Pigovian tax

A Pigovian tax also spelled Pigouvian tax is a tax on all market activity that generates negative externalities outside costs incurred by a producer that are not spoke in the market price. The tax is usually set by the government to adjustment an undesirable or inefficient market outcome a market failure, together with does so by being set survive to the outside marginal live of the negative externalities. In the presence of negative externalities, social cost includes private cost & external cost caused by negative externalities. This means the social cost of a market activity is not returned by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of such(a) negative externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption.

In the presence of positive externalities, i.e., external public benefits gained by the consumer that are non included in the market price, those who did not consent to be element of the market activity receive the benefit, and the market may under-produce. Similar system of logic suggests the build of a Pigovian subsidy to help consumers pay for socially-beneficial products and encourage increased production.

An example sometimes cited is a subsidy for provision of flu vaccines.

Pigovian taxes are named after English economist Arthur Cecil Pigou 1877–1959 who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's hold in sophisticated economics in 1972.

Double-dividend hypothesis

The double-dividend hypothesis proposes that a revenue-neutral substitution of environmental taxes for revenue-raising taxes might advertisement two benefits. The impression was first sophisticated by Tullock 1967 in a paper titled 'Excess Benefit'. The number one benefit or dividend is the expediency or welfare have resulting from a better environment and less pollution caused by a Pigouvian tax imposed on the producer, and thedividend or benefit is a more excellent tax system due to a reduction in the distortions of the revenue-raising tax system, which also produces an improvement in welfare. This image received scant attention until the early 1990s when the economics of climate change attracted attention to the topic of environmental taxes. The term 'double dividend' became widely used following its introduction by David Pearce in 1991. Pearce noted that estimates of the marginal excess burden marginal distortionary cost of existing levels of taxation in the US economy are between 20 and 50 cents per dollar of revenue collected. Because the revenue from the carbon tax would be recycled used to lower preexisting and distorting taxes, the policy would be revenue-neutral, and the secondary benefit from revenue recycling would justify an even higher carbon tax. It is broadly accepted now that the magnitude of the "revenue-recycling" benefit is lower than the 20–50 cents per dollar of revenue, but there are differing views on if theeffect is positive or negative. The sort of parameter suggesting that the second "benefit" is negative proposes a previously unrecognized "tax interaction effect" Bovenberg and de Mooij 1994.

In a 1997 paper, Don Fullerton and Gilbert E. Metcalf evaluated the double dividend hypothesis. They define the double-dividend hypothesis as the theory that environmental taxes can improvements the environment and put economic efficiency simultaneously. Either motivation can legitimately guide a tax reform. The number one dividend intuitively permits sense: decreasing pollutant emissions improves the environment. The improvement in economic efficiency results from a shift away from distorting taxes such as the income tax. Fullerton and Metcalf note that for every $1 extracted in taxes, a $1.35 burden falls on the economy. In a sense, the private sector must swallow a 35 cent excess burden for no particular reason. The moment dividend aims to eliminate some of this excess burden.

Tempting as it may be to try, Fullerton and Metcalf argue, the validity of the double-dividend theory cannot be instituting as a whole. This does not imply that the double dividend hypothesis is untenable but there is just more complication to that. An observer must evaluate used to refer to every one of two or more people or matters circumstance individually. Fullerton and Metcalf do afford guidelines for this analysis. Two questions help kind this analysis: what is the status quo? What are the requirements of the reform? The amount and nature of the current taxes, permits, and regulations greatly influence the results of the extra tax. Also, where the tax revenue goes greatly affects the success of the tax.

Secondly, Fullerton and Metcalf say the preceding literature on Pigovian taxes focused too heavily on the revenue dividend and too lightly on the environmental dividend of environmental taxes. Their predecessors naively value revenue too much, Fullerton and Metcalf argue, because they fail to recognize that all taxes impose costs on someone. These taxes could outweigh the environmental benefit. Thus, the government must usage the Pigovian tax revenue to lower another tax if it wants to minimize the economic harm of a tax.

Fullerton and Metcalf also acknowledgment that the effectiveness of any sort of Pigovian tax depends on whether it supplements or replaces an existing pollution regulation. If the tax replaces a pollution regulation, it will near likely be environmentally neutral, even if it is for revenue-positive. If it supplements the regulation, it may or may not be environmentally and revenue-neutral, depending on the effectiveness of the original regulation. The status quo substantially affects the outcome of a exposed tax.