solutions to the externality problem
Pigovian taxes and subsidies
the Pigovian tax: the thought process
internalizing the externality
MWTP(Q) = 120
2Q
MC(Q) = Q
MEC(Q) = 30
what we want:
the market to stop at Q effic = 30
what is difference between private costs and benefits at Q effic ?
MPB(Q effic ) = 120
2 ⇥ 30 = 60
MPC(Q effic ) = 30
MPB(Q effic )
solution:
our example:
MPC(Q effic ) = 30 = MEC(Q effic )
" MPC (or # MPB) w/tax = MEC(Q effic )
tax = $30
Gazzale (University of Toronto)
ECO101: externalities IV
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