Question

Explain whether or not you think that a Pigovian gas tax is a good option for internalizing externalities associated with transportation. Consider economic, social and environmental factors

Answer 1

Pigouvian tax on Gasoline is a good option for internalizing the negative externality associated with transportation that arises from over consumption of Gasoline.

After tax, people have to pay more for an unit of Gasoline, then people would be more likely to carpool, drive less or, take public transportation. This will help reducing the pollution, high insurance prices, congestion and therefore internalizing the negative externality.

Also, the tax collected from here can be used to reduce other taxes like income tax. In that case society will be more better off because they now have more income and efficient transportation options.