Pigouvian environmental tax
can be used to correct for the presence of externalities.
f gauged correctly, it raises the marginal private cost (MPC) to equal the marginal social cost(MSC) of production (see standard externality diagram).
prevent overproduction/consumption of the pollutant
owever, it can also play a dual role:
Pollution taxes have a negative excess burden (deadweight loss) which canaccount for the excess burden of other taxes, such as labour taxes.
Therefore, an environmental tax confers a
reduces environmental degradation
corrects for other economic distortions
This means that
the optimal environmental tax is not where MAC=MEC, rather,they must also account for the excess burden reductions.
istinguish between a WEAK and STRONG double dividend.
redistributing env. Tax revenue through reducing other distortions improves welfare
relative to lump-sum redistribution.
redistributing tax revenue through reducing other distortions improves the absolutelevel of welfare.