Industrial Growth and Competiton Essay Example | Topics and Well Written Essays - 750 words

Industrial Growth and Competiton - Essay Example According to Perloff (2012) Pigouvian tax can be described as a corrective measure undertaken by state or a body with authority usually inform of imposing tax to restore or limit any inefficient market activities. Taxation is applied on a firm that produces negative externality to other firm or the well-being of the entire community. The aim is to equalise the amount of tax imposed to the negative externality. Let us examine a case of a paint manufacturing firm that pollutes a nearby river using various cost concepts. With the absence of any regulation control measures, the firm can maximise its production activity without thinking of the impact imposed on another firm for example, a boat renting firm to families and individual for recreational purposes. In a typical market analysis, the paint manufacturing firm’s output and price relation can be presented in figure 1 below. In the figure 1 below, there are three main cost concepts: marginal social cost (MSC), marginal private cost (MPC), and Marginal Damage cost. Perloff (2012) defines these costs as follows. The private marginal cost refers to all the direct cost incurred by the firm or producer in creating goods or services. He also defines marginal damage as the additional cost to a firm producing additional unit of a product that impose negative externality on others. Further, he defines social damage cost as the summation of private marginal cost and marginal damage to a producer. This can be illustrated graphically in figure 1 below. Initially, the firm’s output level was at Q0due to absence of any regulation. The firm’s primary focus on this particular market scenario, where there is no any form of regulation on production, focuses on how to maximise production output at any given time. However, the need to reduce pollution leads to introduction of a pigouvian tax to make the firm comply with existing production regulation and be mindful of other