Answer to Question #37131 in Microeconomics for Matches Malone

Question

HI, i would like to know:
Can use an laffer curve in my assignment paper to to show a pigouvan tax for pollution can have a negative effect if raised to high?

Kind regards

Answer 1

The Laffer curve is a representation of the relationship between possible rates of taxation and the resulting levels of government revenue. It illustrates the concept of taxable income elasticity—i.e., taxable income will change in response to changes in the rate of taxation.
As pigouvian tax is a kind of taxes used, the Laffer curve will be useful to see the negative effect if this tax is raised too high, as the government revenue will decrease.