A Possible Conflict between Economic Efficiency and Political Pressure

Abstract

A model of a production externality between two industries facing price uncertainty is specified and a Pigouvian tax introduced and solved using First-Order Conditions (FOC). This solution is then used as a baseline for comparison with results for the level of tax found using an Evolutionary Algorithm (EA) where government, as the policy setter, is facing political pressure in the selective environment of the electorate. It is found in the EA solution that if a government faces political pressure in an uncertain economic environment then the settings for the tax may reflect political caution rather than community preferences.