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Negative Production Externalities and Efficacy of the Pigouvian Tax Policy in a Developing Economy: A Pure Economic Argument

Sarbajit Chaudhuri ()

MPRA Paper from University Library of Munich, Germany

Abstract: This theoretical note examines the usefulness of the Pigouvian tax policy in dealing with negative production externalities and in improving social welfare in a small developing economy. A two-sector, full-employment general equilibrium model with exogenous labour market imperfection is used for the analytical purpose where the sector that faces an imperfect labour market creates pollution through its production and lowers the efficiency of workers. The analysis finds that the socially optimal Pigouvian tax rate may not necessarily be positive and that it crucially hinges both on the degree of labour market imperfection and the scale of negative externalities that production of the dirty commodity generates.

Keywords: Negative production externality; pollution; efficiency of labour; Pigouvian tax; social welfare; general equilibrium. (search for similar items in EconPapers)
JEL-codes: D58 D62 H23 Q52 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2015-03-23
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