UPSC Prelims Marathon Quiz

Statements 1 and 3 are correct. Statement 2 is incorrect.

A Pigouvian tax is a tax on a market transaction that creates a negative externality borne by individuals not directly involved in the transaction. The tax is normally set by the government to correct an undesirable or inefficient market outcome (a market failure).

Examples include carbon taxes-imposed on companies that burn coal, oil or gas which emits greenhouse gases. These emissions cause climate change which is a negative externality.

Some of the advantages include:

1)Fosters market efficiency Pigouvian taxes promote market efficiency by incorporating the additional costs imposed by negative externalities. In such a case, the final cost (original cost plus tax) will reflect the full social cost of the economic activity.Hence, Statement 1 is correct.

2)Generates additional government revenue It is a tax assessed against private individuals or businesses for engaging in activities that create adverse side effects for society. However, it does not promote government companies over private companies. Pigouvian taxes generate additional revenues for the government. The additional funds may be used to subsidize initiatives and programs that will further challenge negative externalities. Hence, Statement 2 is incorrect.

3)Discourages harmful activities In certain cases, Pigouvian taxes may effectively discourage the activities that lead to negative externalities. Examples of pigouvian taxes include tobacco taxes, sugar taxes, and carbon taxes, hence, statement 3 is correct.