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Suppose one state imposed a Pigouvian tax on smoking, and a neighboring state did not. Explain...

Suppose one state imposed a Pigouvian tax on smoking, and a neighboring state did not. Explain the economic rationale for their doing so, and also explain what econometric techniques can help you discover that. How would that work?

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Answer #1

A Pigouvian tax usually laid on negative externalities and when a state thinks that there are lot of negative externalities arising from it, then it usually enacts the tax and this is the case with that state imposing the tax.Similarly the other state feels that there are less negative externalities and imposing a tax would decrease the supply which would not be beneficial to the state and that is the reason why the other state did not inpose the tax. Using regression method for the relation between tax and output can help a lot in this scenario.

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