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(i) There are practical problems in implementing a pigouvias tax scheme. In light of the
difficulties in estimating the marginal damage function, it is found to be hard to find the
correct tax rate.
(ii) Still sensible compromises can be made. Suppose that a certain type of automobile
produces poisonous fumes. In theory a tax based on the number of miles driven enhances
efficiency. But a tax based on mileage might be so cumbersome to administer as to be
infeasible. The government might instead consider levying a special sales tax on the car even though it is not ownership of the car per se that determines the size of the externality but the amount it is driven. The sales tax would not lead to the most efficient possible result, but it still might lead to a substantial improvement over the status quo.
(iii)Another weakness is that the tax approach assumes that it is known who is doing the
polluting and in what quantities. In many case these questions are very hard to answer.
A corrective subsidy(opposite of a tax) is used in case of a positive externality
NatalieR answered the question on June 21, 2022 at 08:55
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