Pigovian tax

A Pigouvian tax is a specific case of incentive taxes, so for taxes that have less of a fiscal purpose, but rather are mainly targeted steering of behavior. They are named after Arthur Cecil Pigou.

Pigouvian taxes are used exclusively to correct by internalising external effects of market failure. Since the market equilibrium in these cases is not Pareto- optimal, a Pareto improvement can be achieved by the use of Pigouvian taxes. The term Pigouvian tax does not include particular incentive taxes on actions in which no external effects are present, but for other reasons ( eg, moral or ideological ) are socially undesirable.

The fiscal effect of a Pigouvian tax should not be based on the level of action externalitätenerzeugenden introduction of the tax, because the damaging activity is to be reduced by applying the tax. This may also decrease the tax revenue (see Laffer theorem). So the fiscal side effect is only the amount of activity, which is still practiced in applying the tax.

In contrast to subsidies consist in Pigou taxes to onerous Steering purpose standards.

Initial situation

A classic example is an economy of two producers on a river, a factory and a further downstream economic fishermen. The factory passes her in the context of production arising waste water into the river, which the profits of the fisherman reduced (negative externality ). Without regulation, the factory in its decision of how much to produce them, do not consider the impact of their decision on the fisherman. This is total economically inefficient, so the factory must reduce their pollution.

There are several ways to move the factory to a lower production:

  • A predetermined by the state maximum would reduce the production of the factory. However, this measure can not be applied to an entire economy. Since each company caused other external costs, the state would have to set individual limits - the effort would be too great.
  • Emissions trading would also limit the production of the factory.
  • Would be awarded the title to the river after the pattern of the Coase theorem, one of the two parties, it also comes to an amicable solution. Who holds the title is from a macroeconomic point of view does not matter.
  • The State applies a Pigouvian tax.

Theoretical foundations of Pigouvian tax

The state sets per emission unit determines a tax. The factory has now to avoid the possibility of either a unit of emission or to issue them and to pay for the tax. A their profit -maximizing factory will produce far as, to the advantage of limiting emissions unit of the control, for these. Let t be the amount at which exactly correspond to the cost of an additional emission unit at the fishing their benefit for the factory. Sets the state as a tax exactly this amount t fixed, then the factory must fully take into account the cost of the fisherman and is ideally exactly cause the optimal amount of emissions ( the external effect is fully internalized ).

In cases of positive externalities can, analogous to the Pigouvian tax, a government subsidy, in this case desirable, higher side-effect effect ( Pigou subsidy ).

Application Examples

Taxes, serve the more the steering of the population than government revenues are, for example, the alcopop tax or tobacco tax. Especially the latter has already been raised several times in the past to generate more tax revenue. Moreover, in both cases are to be mentioned as reason for taxation is not only external effects, but it is from the perspective of the state also called demerit goods, ie goods whose benefits the consumer evaluates too high.

Often, the German eco-tax is mentioned as an example of the Pigouvian tax. Due to the design of the environmental tax but this is only partially the case. Companies that consume a lot of energy, simply pay a reduced rate. As for these companies decreases the incentive to conserve energy, the principle of Pigou tax has not been fully enforced.

Criticism

The state requires precise knowledge of the course of the marginal utility and cost curves of the parties to set a control in an optimal height as possible. In addition, there may be a non-optimal level of Pigouvian tax by state failure.

In practice it is often difficult to choose as the basis for the tax, the emissions themselves. In addition, external effects only in the rarest cases can be accurately measured economically. Selects the state has a different basis, for example, the goods produced or its value, is not necessarily guaranteed that the company reduces the undesirable side effect of the production to the extent necessary. Renegotiation between the tortfeasor (factory) and the injured ( Fischer) a different amount of emissions can be agreed. The fishermen pay the factory for a further reduction of pollution, it comes to an overall welfare loss.

The Pigouvian tax may violate the total condition of the overall economic efficiency. The fact that companies usually rather than quantity are Preisanpasser, the tax may lead to market exit.

In the case of an imperfect market, even a welfare deterioration is possible. A monopolist would take the taxes in its calculations, thus avoiding emissions, but at the same time thereby reducing its production even further than he already does this for the sake of profit maximization.

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