Question

Explain whether or not you think that a Pigovian gas tax is a good option for internalizing externalities associated with transportation. Consider economic, social and environmental factors

Answer 1

A Pigouvian gas tax is a measure to apply upon the each unit of gas bought and sold and it is a solution to correct the negative externality and subsequent market failure. It makes the marginal social cost to be equal to the marginal social profit that makes price of gas to increase and output consumed to be decreased. It helps to decrease the loss to the environment, social sufferings due to the negative externality, also comes down. Besides, the government also gains tax revenue that can be used for other social and productive purposes. The Pigouvian tax method is good, but the demand of gas is relatively inelastic in the industry. Hence, the application of tax, will less deter the people from buying the gas. Rather, the less amount will be spent upon the other industry and economy will suffer. So, it is important to promote the clean technology that emits less pollution in the vehicles used in the transportation industry. Besides, the cap and trade for the institutional players in the industry should also be applied to achieve the overall objective of the controlling the negative externality.
Hence, only application of Pigouvian tax is not enough to correct the market failure in the transportation industry due to inelastic demand. An awareness program for the clean technology and cap and trade program for the institutional players should also be implemented to make it more effective.