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Pigouvian taxes correct market failures, and in the presence of a Pigouvian tax set to the correct level, the market outcome is Pareto efficient. But,
Pigouvian taxes correct market failures, and in the presence of a Pigouvian tax set to the correct level, the market outcome is Pareto efficient. But, moving from the status quo (no corrective tax) to this point is not a Pareto improvement, but it is a Kaldor Hicks improvement. This problem illustrates this in an example with numbers. The market for cobalt has Total Benefit = 100Q 2Q2 and Total Cost = 3Q2. Production of cobalt causes a negative externality equal to 20Q, so that each unit of cobalt production has a negative externality equal to 20. 4. If there is no corrective tax, what is the consumer and producer surplus? (2 points, no explanation required)
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