Pigovian Taxes
Pigovian taxes are reduced when there is some scope for the private sector to internalize externalities. Pigovian taxes interact with pre-existing tax distortions in labor and capital markets, and this affects their optimal levels. Pigovian taxes also need to account for pre-existing regulations, or distortions, affecting activities that are closely related to the taxed activity.The behavioral response to Pigovian taxes may be very limited. John Rye says that we raise oil prices above free market prices. The U.S. is a big oil consumer because of this higher market power would make higher domestic oil taxes. In turn, when oil taxes go up, oil consumption would fall.