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Pigouvian 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. [3]
A Pigovian tax (also called Pigouvian tax, after economist Arthur C. Pigou) is a tax imposed that is equal in value to the negative externality. In order to fully correct the negative externality, the per unit tax should equal the marginal external cost. [ 56 ]
Related efforts to achieve socially optimal quantities of externalities have long been a focus of microeconomic research, most famously by Ronald Coase [1] and Arthur Pigou. [2] Externality problems persist despite past remedies, which makes newer approaches such as the efficient voter rule important.
Arthur Cecil Pigou (/ ˈ p iː ɡ uː /; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge , he trained and influenced many Cambridge economists who went on to take chairs of economics around the world.
Pigou developed the concept of externalities in 1920 through ‘The Economics of Welfare’. [5] Essentially, Pigou argued negative externalities (spillover) of an activity should incur an extra cost or tax while activities that produce a positive externalities (spillover) should be subsidized to further encourage this activity.
Arthur Pigou had previously developed the concept of economic externalities in a publication of 1920 [15] in which he proposed that what is now referred to as a Pigouvian tax equal to the negative externality should be used to bring the outcome within a market economy back to economic efficiency. [13]
Influential theories have been the ability theory presented by Arthur Cecil Pigou [2] and the benefit theory developed by Erik Lindahl. [ 3 ] [ 4 ] There is a later version of the benefit theory known as the "voluntary exchange" theory .
This concept was introduced by Arthur Pigou, a British economist active in the late nineteenth through the mid-twentieth century. He showed that these externalities occur when markets fail, meaning they do not naturally produce the socially optimal amount of a good or service.