Question

Do you consider Pigovian Taxes primarily as an efficient method of internalizing externalities, or more like licenses to pollute”? Can you elaborate your answer as well please thank you.

Answer 1

The externality is a situation where the action of one person affects the other persons.There are two types of externality positive and negative.

The Pigovian taxation refers to the situation where any market activity generates negative externality a specific amount of tax levied by the firm in order to control pollution in the market.

The Pigovian taxation considered the best method to correct the pollution where environmental damages are commanded by the firm who is responsible. However, the method has certain limitation the firm is paid the amount of the unit of the pollution the gain firms ready to bear the tax and willing to produce more units by compensating. Example cement manufacturing industry where produces the more units without taking into considering the environment al damages.

Thus, it is clear that Pigovian taxation is not the only solution to correct the negative externality but the government has to adopt other methods to correct the negative externality.