What is pigovian fees?

Pigovian fees

when a price is charge for pollution, a firm is motivated to cut back on pollution. Economist's A.C. Pegovian, in the early part of 20th century, had suggested placing a price on pollution, to check it. It is known as Pigovian fee.

As defined by Kolstad,  "A pigovian fee is an emission fee exactly equal to the aggregate marginal damage caused by the emissions, when evaluated at the effii level of pollution.

Efficient level of pollution would be that where the marginal damage suffered by the victim's is equal to the marginal benefits (,that is the marginal saving or the cost not incurred) to the pollution.

In the figure Emission is shown on Xanax and marginal damage, marginal saving & tax on the 'Y'  axis.  MS , is the saving to the firm at the margin for emitting pollution. If it cut back on pollution, the firm has to spend thsese amount or incur marginal abatement cost. That amount is saved & hence MS is actually the negative of marginal cost for particular level of emission.

As emission goes on increasing, the marginal saving declines. More emission means low pollution control efforts hence low marginal cost. Thus, the MS is low at high level of emission Marginal Damage suffered by the society is described by the curve MD. As emission or pollution goes on increasing the damage automatically increases. According to marginal principle, the optimum pollution level for a society is one, where MS & MD match. Now suppose the firm's  are generating an amount of emission as a production of their production activity. If no amount of tax is imposed, then emission would cut down to e*. If it is the tax per unit of pollution then , the total tax paid for e  amount of emission of pollution would be otDe. But if, emission is cut down to e* , the total spending of the firm  (s) would be otEe*  (total tax for e* pollution) + abatement cost Ever*. When we add up the marginal unit, we arrive at total, &thus the area under the marginal saving curve between ee* would represent the total reduction in saving due to pollution or the total costs incurred to check pollution. Thus, we see that the firm (s) would save an amount equivalent to the area EDC. So it pays for the firm to cut down an emission to e* level, when a tax of it per unit of pollution is imposed. Thus optimum level of pollution is achieved through pigovian tax.

However, when we come to practical implementation of pigovian fee, we would meet with some fundamental difficulties. It concerns chiefly the estimation of marginal damage and information on abatement cost of the firm. In most of the cases pollution affects a large number of people as it happens in case of air and water pollution where millions of people are affected. Thus the society's marginal damage is the sum of marginal damage suffered by all people. Hence information needs to be collected on a very large scale. So also information regarding the abatement cost functions of the firm's needs to be collected from a large number of firm's. Thus, it is possible that the cost of collection of information on such a huge scale may be exorbitantly high and designing & implementing a pigovian fee may not be economically feasible at all.