Economics · Environmental Economics and Pigouvian Taxation
In the field of environmental regulation and welfare economics, which corrective policy instrument was introduced in 1920 to address market inefficiencies by internalizing uncompensated spillover costs, and what are its specific operational characteristics regarding the cost curve shift and its optimal valuation?
- 1Pigouvian Tax, proposed by A.C. Pigou, which shifts the Marginal Private Cost (MPC) upward to the Marginal Social Cost (MSC) by setting the tax equal to the Marginal External Cost (MEC).✓
- 2Screening Mechanism, developed to address post-contractual information asymmetry by setting a tax equal to the marginal willingness-to-pay.
- 3Cap-and-Trade System, where the government sets a fixed pollution cap and provides subsidies equal to the Marginal Social Benefit to firms with low abatement costs.
- 4Coase Theorem, which facilitates private bargaining to eliminate the Marginal Private Cost by defining property rights when transaction costs are high.
Correct answer
Pigouvian Tax, proposed by A.C. Pigou, which shifts the Marginal Private Cost (MPC) upward to the Marginal Social Cost (MSC) by setting the tax equal to the Marginal External Cost (MEC).
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