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Negative Production Externalities and Efficacy of the Pigouvian Tax Policy in a Developing Economy: A Pure Economic Argument

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  • Chaudhuri, Sarbajit

Abstract

This theoretical note examines the usefulness of the Pigouvian tax policy in dealing with negative production externalities and in improving social welfare in a small developing economy. A two-sector, full-employment general equilibrium model with exogenous labour market imperfection is used for the analytical purpose where the sector that faces an imperfect labour market creates pollution through its production and lowers the efficiency of workers. The analysis finds that the socially optimal Pigouvian tax rate may not necessarily be positive and that it crucially hinges both on the degree of labour market imperfection and the scale of negative externalities that production of the dirty commodity generates.

Suggested Citation

  • Chaudhuri, Sarbajit, 2015. "Negative Production Externalities and Efficacy of the Pigouvian Tax Policy in a Developing Economy: A Pure Economic Argument," MPRA Paper 63292, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:63292
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    References listed on IDEAS

    as
    1. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    2. Dennis W. Carlton & Glenn C. Loury, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 559-566.
    3. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 2002. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 24, pages 447-470, Edward Elgar Publishing.
    4. Robert E. Kohn, 1986. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities: Comment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 625-630.
    5. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    6. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 133-151, Winter.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Negative production externality; pollution; efficiency of labour; Pigouvian tax; social welfare; general equilibrium.;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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