Pigovian Tax

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A Pigovian Tax is a market activity tax that is intended to balance for negative externalities.



  • (Wikipedia, 2020) ⇒ https://en.wikipedia.org/wiki/pigovian_tax Retrieved:2020-1-23.
    • A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that generates negative externalities (costs not included in the market price). The tax is intended to correct an undesirable or inefficient market outcome (a market failure), and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. [1] Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption.[2] In the presence of positive externalities, i.e., public benefits from market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of a Pigovian subsidy to help consumers pay for socially-beneficial products and encourage increased production. [3] An example sometimes cited is a subsidy for provision of flu vaccine. [4]

      Pigovian taxes are named after English economist Arthur Cecil Pigou (1877–1959) who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics in 1972.[2]

  1. Sandmo, Agnar (2008). "Pigouvian taxes," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  2. 2.0 2.1 .
  3. Turvey, Ralph (1963). "On Divergences between Social Cost and Private Cost", Economica, N.S., 30(119), pp. 309–313.
  4. • Carlton, Dennis W., and Glenn C. Loury (1980). "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," Quarterly Journal of Economics, 95(3), pp. 559–566.
       • Althouse, Benjamin M., Theodore C. Bergstrom, and Carl T. Bergstrom (2010). "A Public Choice Framework for Controlling Transmissible and Evolving Diseases," Proceedings of the National Academy of Sciences, January 26; 107(suppl. 1), pp. 1696–1701.