Suppose the government does not know the level of the marginal damages, but that

Question

Suppose the government does not know the level of the marginal damages, but that the neighbors themselves can effectively petition the government to impose a Pigouvian tax of any size after a failed negotiation. What will the set of outcomes of these negotiations include Lets say the government wanted to implement the efficient quantity but with this feedback mechanism, how might the government implement a reporting scheme (with possible fines on both sides) to insure an efficient outcome if the original model does not. What if the government has access to a costly auditing technology

Explanation / Answer

In situations when the government is not aware of the damage then it makes sense to have an arbitrator who has knowledge of such situations to arbitrate in the matter. When this is done then proper outcomes can be achieved. The arbitrator can state that the tax which needs to be imposed has to keep in mind the detrimental nature of the product or service and the tax can be implemented accordingly.

The government should make sure that the auditing technology being implemented is not costly and make changes in the original model as it did not work the first time. They should understand where the flaw is and make amends so that when the government wants to implement the reporting scheme they should not meet a dead end as they did with the original model.

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