Pigovian Tax
Categories: Tax
There’s a new factory in town, and your neighborhood isn’t happy about it. Nearby residents aren’t looking forward to an increase in local lung cancer rates and a decrease in local housing prices. These are social costs that the factory is putting upon people without paying for them...also called negative externalities.
Yeah, there are positive externalities too...like if the factory emitted not pollution, but pollution-free flower-smells, which raised local housing prices. In that case, the people would owe the firm for the free social benefit it got. Nobody likes giving out free stuff, so positive externalities aren’t too common or much of an issue.
But negative externalities caused by firms onto local residents is a recurring thing. And economists consider this inefficient. And economists don’t like inefficiency.
One way to address unpaid social costs from negative externalities is through a corrective tax...the hero of all taxes. Taxes that are designed to fix negative externalities are called Pigovian taxes (some people spell it “Pigouvian”).
Pigovian taxes are designed to correct market inefficiencies. The tax will equal the measured social cost of the negative externality.
Besides the classic polluting factory Pigovian tax, Pigovian taxes can be used in other areas, like public healthcare costs. For instance, a tax on high-sugar drinks and tobacco discourages use, which in theory lowers public healthcare costs via “preventative care”...basically, drinking less liquid sugar and smoking less tobacco. But hey, YOLO.
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Finance: What is the Free Rider Problem?10 Views
finance a la shmoop. what is the free rider problem? free rider not Easy Rider
but a great film ask your parents about it and go watch it someday.
alright and if there was any confusion this video is not about ebikes either. [kid holds up VHS in a movie rental store]
you know those battery-powered bikes? okay so you're a tax derelict. you hate
paying taxes so much you just don't. but then North Korea sends over a nuke.
well it's about ten miles off the coast just about to make you glow in the dark
forever, when one of our homing robot defense missiles shoots out the belly of
a nuclear sub, and blows that nuke from North Korea all the smithereen. thank you
very much. so now the country is safe not so much North Korea but that's a
different story. well you didn't want to pay your taxes. [missile flies through the air]
you didn't want to fund that sub or the brave sailors in it or the homing drone
or the myriad other fancy tech things that powered it. you deadbeat tax non
payer that you are, you wanted a free ride. a free ride on everyone else's hard
earned money that they paid taxes on. all right so how do we avoid this problem
like you? well we have the IRS and they have an army of geeks who make sure you
pay your taxes, so you can't just freeride on the rest of our backs. and if
you don't pay your taxes you face serious jail time and we'll have to end
up paying more than if you just fallin in step and pay your taxes on time along [man is thrown in jail.]
with everyone else. got it all right free-rider problem solved.