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  • Pigouvian Tax: Correcting Negative Externalities

Pigouvian Tax is Not a Pareto Improvement

A Pigouvian tax designed to move a market to a Pareto-efficient output level is not, in itself, a Pareto improvement. This is because the policy makes the taxed producer worse off than they were before its implementation. Although the combined financial benefits to the government (as tax revenue) and to the party previously harmed by the externality are greater than the producer's loss, the producer's individual welfare decreases. Consequently, unless a compensation mechanism is established, the producers who bear the cost of the tax are likely to oppose the policy. [7]

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Introduction to Microeconomics Course

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

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