Set the fine for emitting a unit of pollution equal to the appropriate Pigovian tax
For example, Eric Kades, in a careful examination of policy solutions for the externalities of antibiotic use, describes antibiotic use as generating negative externalities that should be dealt with by imposing a Pigovian tax
If the benefit from producing the good is greater than both the cost of production and the cost of the pigovian tax
, then it remains economically efficient for continued production?
Part of the attraction of the Pigovian tax
is that it does not require the government or regulator to know the individual abatement costs of firms or households, but only requires that actors know their own abatement costs in making the decision of whether to internally abate or pay the tax.
Since each unit of the good produced results in an external damage of $75, a simple Pigovian tax
on output of $75 per unit "corrects" the externality problem.
Efficiency would be achieved by a penalty structure resembling a Pigovian tax
, forcing drivers to internalize the external costs of drunk driving.
Market prices do not fully reflect this aspect of the situation, and so (Nordhaus concludes) a Pigovian tax
on carbon usage is justified.
The objective of financial regulation in a system context, then, is to levy the appropriate Pigovian tax
that mitigates these externalities to the extent possible, and thereby move the financial system as a whole closer to an efficient outcome.
V] = 0), this Pigovian tax
on development investment l would guarantee efficiency.
A corrective Pigovian tax
for road congestion is of course available: a variable time-of-day toll, now technologically feasible but so far politically impossible or nearly so (except possibly in Singapore or in the pages of The Economist).
11) The model shows that, with a plausible welfare function specification, incorporation of a charge based on the services provided by the environment may yield the same result as the familiar Pigovian tax
Starting from a zero-tax scenario, the authors find that 69 percent of the welfare improvement from an ideal Pigovian tax
can be gained by the three-part instrument involving a tax on gas, a tax on size, and a subsidy to "newness.