Final answer:
Changing from a Pigouvian subsidy to a Pigouvian tax is likely to further decrease emissions levels, provided that the tax is high enough. The tax creates a financial disincentive for pollution, though accurate implementation and public resistance can pose challenges.
Step-by-step explanation:
When the government changes from a Pigouvian subsidy to a Pigouvian tax for reducing emissions, the emissions level is expected to change as firms’ behaviors are influenced by this alteration in economic incentives. A Pigouvian subsidy is a payment by the government to firms for reducing their emissions, thereby encouraging them to either reduce pollution or switch to cleaner technologies. In contrast, a Pigouvian tax imposes a cost on firms for their emissions, which also gives them an incentive to reduce pollution to avoid the tax.
Assuming the Pigouvian tax is set at a level high enough to encourage further reductions in emissions, firms will have a financial incentive to pollute less, as seen in the scenario where a firm decides to reduce pollutants by 30 pounds because the marginal cost of reducing pollution by this amount is less than the pollution tax. This is because pollution taxes encourage firms with lower costs of abatement to reduce emissions more than those with higher abatement costs.
However, implementing a Pigouvian tax can be challenging as it requires accurate knowledge of abatement costs, which can be difficult to obtain due to firms having incentives to underreport these costs. Furthermore, resistance from those being taxed, as well as the impact on consumers and businesses, often makes it difficult to set a high enough tax to effectively reduce emissions.