ECON 2304 Lecture Notes - Lecture 16: Transaction Cost, Coase Theorem, Pigovian Tax
19 Oct 2016
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Document Summary
Corrective tax: a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality. Also called pigouvian taxes after arthur pigou. The ideal corrective tax = external cost. For activities with positive externalities, ideal corrective subsidy = external benefit. Other taxes and subsidies distort incentives and move economy away from the social optimum. Make private decision-makers take into account the external costs and benefits of their actions. Move economy toward a more efficient allocation of resources. Different firms have different costs of pollution abatement. Efficient outcome: firms with the lowest abatement costs reduce pollution the most. Firms with low abatement costs will reduce pollution to reduce their tax burden. Firms with high abatement costs have greater willingness to pay tax. The gas tax the gas tax targets three negative externalities: Congestion: the more you drive, the more you contribute to congestion. Accidents: larger vehicles cause more damage in an accident.
