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8 Feb 2020

When the government imposes the Pigouvian tax to fix negative externality what happens after fixing negative externality?

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Trinidad Tremblay
Trinidad TremblayLv2
8 Feb 2020

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Related questions

The government often intervenes when private markets fail to provide an optimal level of certain goods and services. For example, the government imposes an excise tax on gasoline to account for the negative externality that drivers impose on one another. Why might the private market not reach the socially optimal level of traffic on the road without the help of the government?

A way to resolve the negative externality problem is to simply tax the producer the amount of the negative externality. What is another way? Please explain in detail.

Demand: P = 7 -2Q

Supply: P = 4 + Q

Where P is output price in $/bushel and Q is billions (1,000,000,000s) of bushels.

1. Suppose there is a negative externality associated with wheat production. The costs that it imposes on society from water quality and soil erosion issues are estimated to be $1.50 higher per bushel than the private costs reflected in our supply function.

A. How much is the total estimated externality cost being borne by society? (hint: the per bushel externality cost times the total bushels produced at market equilibrium)

B. What do we call a tax that is designed with a goal of correcting for a negative externality?

C. How much would such a tax have to be to achieve this goal in this market?

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