Question

2. (15) The government wants to use a payroll tax (a tax of τ for each hour of work) to raise money to finance cleanup of environmental damage caused by companies. Democratic politicians argue that it is unfair to make workers pay higher taxes to fix a problem that companies created, and therefore insist on imposing the payroll tax on employers. Evaluate this argument. 3. (10) A labor economist is estimating the effect of the wage on labor supply, using the regression model:

Answer 1

Taxes that are imposed to deal with the effects of negative externalities (here environmental damage caused by companies), are known as corrective taxes or Pigovian taxes. In the above question, it is unfair to make workers pay higher taxes to fix the problem that companies created. The government should impose pigovian tax on the companies. In other words,companies must be charged a fees as they are damaging the environment.This can be done by imposing the payroll tax on employers of the companies.