Learn Before
Government Intervention Strategies for Externalities
Pigouvian Tax (Definition)
Negative Consumption Externalities
Market-Based Policies
Pigouvian Tax: Correcting Negative Externalities
A Pigouvian tax, named after economist Arthur Pigou, is a tax levied on activities that generate negative externalities. The goal is to correct an inefficient market outcome where the price of a good or service is too low because it fails to reflect its true social cost. By raising the price, the tax forces decision-makers, whether they are producers or consumers, to internalize the external cost. This adjustment ensures they account for the full marginal social cost of their actions, which creates an incentive to reduce the activity to a more socially optimal level.
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The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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Comparison of Outcomes: Government Intervention vs. Coasean Bargaining
Distributional Effects of Pigouvian Taxes vs. Production Quotas
Mandated Compensation for Externalities
Comparison of Distributional Outcomes: Mandated Compensation vs. Pigouvian Tax
Inefficiency of Output Reduction Policies When Cleaner Technologies Exist
Evaluating Externality Policies using Pareto Efficiency and Fairness Criteria
Factors Determining the Efficacy of Externality Policies
Political Power as an Obstacle to Legislating Externality Costs
Informational Barriers to Government Intervention on Externalities
Regulation of Noise Pollution via Time Restrictions
Examples of Product Bans as Environmental Policy
Regulation of Harmful Substances via Limits and Bans
Analysis of Externality Intervention Policies
A large-scale farm uses a pesticide that runs off into a nearby river, harming a commercial fishing operation. A government body determines the exact monetary damage to the fishery per ton of pesticide used. It wants to implement a policy that forces the farm to reduce its pesticide use to an efficient level AND ensures the fishing operation is paid for the damages it still incurs. Which of the following policies would achieve both of these specific objectives?
Comparing Government Interventions for Pollution
A chemical factory's production process releases a pollutant into a river, which imposes costs on a downstream fishery. The market price of the chemical does not account for these downstream costs. To address this situation, a government imposes a tax on the factory for each gallon of pollutant released. What is the primary economic goal of this tax in the context of market efficiency?
When a factory's production process creates a harmful pollutant, a government policy that completely bans the factory's operation is the most economically efficient solution because it entirely eliminates the negative externality.
A government is considering two policies to address pollution from a factory that harms a nearby community. Both policies are designed to achieve the same, socially optimal level of production.
- Policy A: A per-unit tax on the factory's output, equal to the marginal external cost, with the revenue going to the government.
- Policy B: A legal requirement for the factory to pay compensation directly to the harmed community, with the payment equal to the marginal external cost.
From the factory's perspective, how do the total costs (i.e., the reduction in its profits) of these two policies compare?
Policy Evaluation for Urban Noise Pollution
A government wants to reduce industrial pollution to a specific, socially optimal level. It is considering two different policies to achieve this exact same reduction: 1) setting a quantitative limit (a quota) on the total amount of pollution allowed, or 2) imposing a per-unit tax on emissions. What is a key difference in the economic outcomes between the tax and the quota?
A city government is planning to address the negative externality of air pollution from its public bus fleet, which currently uses diesel engines. The proposed policy is to implement a per-gallon tax on diesel fuel, set equal to the estimated marginal external cost of the pollution. Shortly before the policy is enacted, a study confirms that converting the fleet to electric power would be a cost-effective alternative, eliminating most pollution and reducing long-term operating costs. Given this new information, which statement provides the most accurate economic evaluation of the proposed diesel fuel tax?
Match each government intervention strategy for correcting a negative externality with its primary mechanism or distinguishing outcome.
A paper mill discharges chemical waste into a river, which significantly harms a downstream town's tourism industry that relies on fishing and boating. Which of the following policy actions is specifically designed to make the paper mill's managers include the cost of this harm in their operational cost-benefit analysis?
Distinction Between Pareto Efficiency and Pareto Improvement in Policy Intervention
The 'Polluter Pays' Principle in Government Intervention
Pigouvian Tax: Correcting Negative Externalities
Political Favoritism as a Source of Unfair Policy Outcomes
Government Regulation via Quantitative Limits (Quotas)
Government Intervention to Reduce Output When an Externality is Inherent to Production
Prerequisites for Effective Government Intervention on Externalities
Germany's Carbon Price Reform as a Pigouvian Tax
Pigouvian Taxes as a Solution to Missing Markets
Comparison of Coasean and Pigouvian Solutions to Externalities
Pigouvian Subsidy (Definition)
Pigouvian Tax: Correcting Negative Externalities
Practical Limitations of Government Intervention on Externalities
Comparison of Social and Private Costs in Negative Consumption Externalities
Positional Externalities
Market Failure and Social Dilemma: The Case of Antibiotic Overuse
A person's choice to smoke a cigarette in a crowded public space creates effects for others not involved in the decision. Arrange the following statements to correctly describe the economic sequence of events that leads to an inefficient market outcome.
A person purchasing a new, high-end electric car benefits the environment by reducing their personal carbon emissions. However, this purchase also causes a neighbor to feel intense envy. In economic terms, this envy is considered a negative consumption externality.
When an individual's consumption of a good generates a negative externality, the social cost associated with that consumption is ________ than the private cost borne by the individual. This discrepancy typically leads to a market outcome where the good is ________-consumed compared to the socially optimal level.
An individual in an apartment building purchases a new stereo system and plays music at a volume that significantly disturbs their neighbors. From an economic perspective, which of the following statements best analyzes this situation?
Analyzing the Market for Single-Use Plastic Bags
When an individual's consumption of a good generates a negative externality, the social cost associated with that consumption is ________ than the private cost borne by the individual. This discrepancy typically leads to a market outcome where the good is ________-consumed compared to the socially optimal level.
Pigouvian Tax: Correcting Negative Externalities
Cap-and-Trade Systems for Emission Control
Pigouvian Tax: Correcting Negative Externalities
Learn After
Graphical Analysis of a Corrective Tax on the Banana Market (Figure 10.4)
Optimal Pigouvian Tax Formula
Impact of a Per-Unit Tax on a Producer's Marginal Cost
Alternative View of Pigouvian Tax: Reducing the Producer's Received Price
Impact of a Pigouvian Tax on Parties Harmed by the Externality
Government Revenue from a Pigouvian Tax
Pigouvian Tax is Not a Pareto Improvement
Potential for Compensation Following a Pigouvian Tax
Bibliographic Reference: Arthur Pigou's 'Wealth and Welfare' (1912)
Tax on Single-Use Plastic Bags to Change Consumer Behavior
Analysis of a Corrective Tax
A factory's production process releases a pollutant into a nearby river, harming the local fish population and increasing healthcare costs for residents downstream. The market price of the factory's product does not account for these downstream costs. Which of the following is specifically designed to correct this type of market inefficiency by making the producer account for the full societal cost of its actions?
Mechanism of a Corrective Tax
A factory's production process creates air pollution that affects the health of nearby residents. Analyze this scenario by matching each economic term to its correct description.
Evaluating a Policy Response to Market Inefficiency
The primary objective of a tax levied on an activity that creates negative external effects is to generate revenue for the government.
A tax levied on an activity that generates negative external effects is designed to force the producer to ______ the social costs of their production, thereby aligning their private costs with the true costs to society.
A market for a product is characterized by a significant negative external effect, such as pollution. Arrange the following statements to describe the logical sequence from the initial market failure to its correction using a specific policy tool.
In which of the following situations would a tax designed to make a producer internalize the full social cost of their activity be the most appropriate economic policy to address the market failure?
Evaluating the Multifaceted Impact of a Corrective Tax
Analyzing a Market Inefficiency
What is the primary economic objective of a tax levied on an activity that generates a negative external effect for society?
Correcting Market Inefficiencies
The primary purpose of a tax levied on an activity that causes harm to third parties is to maximize government revenue.
Match each economic term related to market inefficiencies with its correct definition.
Evaluating a Pollution Control Policy
A tax levied on a market activity that generates negative consequences for third parties, designed to make the price of the activity reflect its true social cost, is known as a(n) __________.
A city government observes that heavy traffic during rush hour is causing significant air pollution and lost productivity for all citizens. To address this, they introduce a 'congestion charge'—a fee levied on vehicles entering the downtown area during peak times. The fee amount is specifically calculated to match the estimated societal cost of the pollution and delays caused by one extra car. This policy is a practical application of what core economic concept?
A factory's production process creates a negative external effect. Arrange the following events into the logical sequence that describes the market problem and the application of a specific type of tax to correct it.
Evaluating Environmental Policy Options
Evaluating a Policy for Traffic Congestion
Distributional Effects of a Pigouvian Tax vs. Regulation