ECO101H1 Lecture Notes - Lecture 2: Pigovian Tax, Allocative Efficiency, Social Cost
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New market price increases by less than the tax amount: burden of the tax. In the presence of a tax on the production of a good: consumers pay a higher price (worse off, producers receive a lower after-tax price (worse off, elasticity determines the burden of the tax. Perfectly inelastic demand market demand increased by the full amount of the tax and full burden is paid by the consumers. Environmental regulation reduce emissions as cheaply as possible: environmental regulations and standards are inefficient, pigouvian/emissions taxes. Cannot reduce pollution more cheaply pay more taxes. Allocates pollution to those factories with the highest cost of reducing it: cap-and-trade. Regulator determines overall cap and allocates permits to firm. Firms with higher cost of reducing pollution will pay more for permits. Firms wish lower cost of reducing pollution will sell permits. In the presence of market failures, governments can intervene to improve market efficiency.
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