Carbon Tax vs Pigouvian Tax
Carbon Tax and Pigouvian Tax are related concepts in AP Economics that students often mix up. In short: carbon tax is a carbon tax is a fee on the carbon content of fuels, designed to make polluters pay for the external cost of emissions. Meanwhile, pigouvian tax is a Pigouvian tax is a tax on a good with a negative externality, set equal to the external cost to restore the efficient quantity. Here is how they compare side by side.
A carbon tax is a fee on the carbon content of fuels, designed to make polluters pay for the external cost of emissions.
It is a Pigouvian tax that internalizes the negative externality of carbon emissions, raising the private cost up to the social cost and reducing pollution to a more efficient level. Revenue can fund rebates or green investment.
A Pigouvian tax is a tax on a good with a negative externality, set equal to the external cost to restore the efficient quantity.
By raising the producer's marginal private cost up to the marginal social cost, it internalizes the externality. The tax reduces output to the socially optimal level and eliminates deadweight loss. A carbon tax is a common example.
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