ECO101H1 Lecture Notes - Lecture 2: Pigovian Tax, Demand Curve, Marginal Cost
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ECO101H1 Full Course Notes
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Government regulation how can the government correct for externalities: market based policies. Pigouvian taxes (-ve externality) and subsidies (+ve externality) Tradable pollution permits (cap-and-trade: command and control policies. Tax equal to the marginal external cost at the qoptimum: gives buyers and sellers incentive to take account of their actions, market equilibrium becomes socially optimal outcome. By imposing taxes on the suppliers (or consumers) of a good, marginal costs increase (marginal benefits decrease: internalise the externality -> making implicit costs explicit. A steel plant is currently producing 5000 tons of steel per day for a price of per ton. The production of each ton of steel generates worth of pollution. The steel industry is perfectly competitive with the usual u-shaped cost curves and faces a downward sloping demand curve. For the firm to be fully internalising the cost of externality, it needs to be operating off the smc curve.