Economy / Taxation / Pigovian Tax +Ad Valorem tax
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).