The diagram to the right illustrates the working of a Pigovian tax. (For an explanation of this type of diagram, see social cost.) A tax shifts the marginal private cost 9L0-402 curve (MPC) up by the amount of the tax (to MPC + T). Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level (Qs) by reducing the marginal 9L0-509 Exam externality to the marginal tax. The total tax revenue (which could be used to mitigate the effect of the negative externality) is equal to the area 0EAB.
A key problem with Pigovian tax is that of calculating what level of tax will counterbalance 9L0-509 the negative externality. Political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax; 9L0-402 Braindump while lobbying of government by special interests who calculate the negative utility of the externality higher than others may also tend to increase the level of the tax levied, which will tend to result in a sub-optimal level of production.
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