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The Pigovian tax on capital-intensive industries

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  • Maruyama, Yuuki

Abstract

Government intervention in the market and industrial policy tend not to be considered good. However, as can be seen from the Cobb-Douglas production function, capital has the effect of increasing the marginal productivity of labor, and the effect is greater in industries with high labor share (labor-intensive industries). For this reason, if a Pigovian tax is imposed on capital-intensive industries, some capital will move to labor-intensive industries and workers' wages will increase. This paper uses a two-sector model to analyze the optimal Pigovian tax rate that will maximize the income of workers. It shows that the optimal Pigovian tax rate is higher in countries with higher productivity in capital-intensive industries and have more capital and less population.

Suggested Citation

  • Maruyama, Yuuki, 2019. "The Pigovian tax on capital-intensive industries," SocArXiv 9mztn, Center for Open Science.
    • Handle: RePEc:osf:socarx:9mztn
    DOI: 10.31219/osf.io/9mztn
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