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

Chaudhuri, Sarbajit (2015): Negative Production Externalities and Efficacy of the Pigouvian Tax Policy in a Developing Economy: A Pure Economic Argument.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Negative production externality; pollution; efficiency of labour; Pigouvian tax; social welfare; general equilibrium.
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

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