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Pigovian tax |
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Pigovian taxes are named after well-known economist Arthur Pigou. They are adept at addressing problems related to economic externalities.
A Pigovian tax is also known as Pigouvian tax. Primary aim of a Pigovian tax is to adjust negative externalities that are present in a particular market activity. Pigovian taxes get their name from noted economist Arthur Pigou (1877-1959). He was responsible for developing the concept of economic externalities.
Explanation of Pigovian Tax
Pigovian tax has also been explained as a special type of tax. It is imposed on business entities that either give rise to additional social expenses or perform activities that lead to pollution in some form. Pigovian taxes are regarded as being extremely effective as far as correction of negative externalities is concerned.
Application of Pigovian Tax
A main reason behind application of Pigovian taxes is inability of market economies to provide adequate incentives as far as reduction of negative externalities is concerned. Quite often it has been observed that companies, which have polluted their surroundings through their activities, have been penalized by Pigovian taxes.
Benefits of Pigovian Tax
Pigovian taxes are regarded as extremely effective as far as improvement of market efficiency is concerned. It is regarded as a conventional way with regards to market forces in an economic system.
Problems of Pigovian Tax
A major problem of Pigovian taxes is regarding calculation of exact extent that would be applicable with regards to counterbalancing of negative externalities. There are certain external factors, like political issues for example, that pose problems regarding proper implementation of Pigovian taxes.
Criticism of Pigovian Tax
Critics of Pigovian tax point out that these taxes often lead to illegal activities like black marketing and smuggling for example. This happens especially when Pigovian taxes lead to significant differences in values of well-known goods and services in territories that are close to a particular market.
Pollution Rights Markets
Pollution rights markets came up in 1970s in USA and in 1980s in other economically advanced countries. Even though these markets are not better than Pigovian taxes in terms of efficiency they are nonetheless preferred more by formulators of policies.
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