Pigovian Tax +Ad Valorem tax

Pigovian Tax:

• Definition:
• A Pigovian tax is imposed on transactions that generate negative externalities, such as pollution or other harmful effects on third parties.
• Externalities Explanation:
• Negative Externality Example: Pollution caused by the consumption or production of certain goods harms third parties (bystanders).
• Positive Externality Example: Restoration of historic buildings, research in new technologies, and libraries provide positive effects on third parties.
• Carbon Tax as a Pigovian Tax:
• Carbon Tax in India (Clean Environment Cess):
• Imposed since 2010.
• Rate of ₹400 per tonne on coal, lignite, and peat.
• Aims to finance and promote clean environment initiatives, fund research in clean environment areas, and related purposes.
• Applies to domestically produced or imported coal.
• Aligns with the "polluter pays" principle.
• International Practices:
• Many countries levy carbon taxes on various fossil fuels, including petroleum and natural gas.
• Objective:
• Discourage activities that contribute to negative externalities, such as carbon emissions, by imposing a tax.
• Principle of "Polluter Pays":
• Reflects the idea that those who generate pollution or negative externalities should bear the associated costs.
• Positive Externalities Consideration:
• While Pigovian taxes are often associated with negative externalities, the concept can also apply to activities with positive externalities, where the tax helps fund or incentivize beneficial activities.
• Application for Climate Change Mitigation:
• Carbon taxes specifically target carbon emissions and aim to discourage the use of fossil fuels, contributing to global efforts to combat climate change.
• Revenue Utilization:
• Revenue generated from Pigovian taxes, such as the Clean Environment Cess, is typically directed towards initiatives that address or mitigate the impact of the negative externalities.
• Conclusion:
• Pigovian taxes, like carbon taxes, play a crucial role in internalizing the external costs associated with certain economic activities. By discouraging harmful practices and supporting positive externalities, these taxes contribute to a more sustainable and environmentally conscious economy.

Ad Valorem Tax

• An ad valorem tax pertains to any tax determined by the monetary worth of the taxed entity, with the term itself translating to "according to value." 
• This tax relies on the assessed value of an item, whether it's real estate or personal property. 
• Property taxes on real estate constitute the most prevalent form of ad valorem taxes. 
• Typically, this tax is applied during a transaction, as seen in sales taxes or value-added taxes (VAT).