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A Pigouvian tax (also spelled Pigovian tax) is a tax on any market activity that generates negative externalities (i.e., external costs incurred by third parties that are not included in the market price). A Pigouvian tax is a method that tries to internalize negative externalities to achieve the Nash equilibrium and optimal Pareto efficiency. [1]
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 expanded upon Marshall's ideas and introduced the concept of "Pigovian taxes" or corrective taxes aimed at internalizing externalities by aligning private costs with social costs. His work emphasized the role of government intervention in addressing market failures resulting from externalities.
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.
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.
The Pigou–Dalton principle (PDP) is a principle in welfare economics, particularly in cardinal welfarism. Named after Arthur Cecil Pigou and Hugh Dalton, it is a condition on social welfare functions. It says that, all other things being equal, a social welfare function should prefer allocations that are more equitable. In other words, a ...
The distinction between pecuniary and technological externalities was originally introduced by Jacob Viner, who did not use the term externalities explicitly but distinguished between economies (positive externalities) and diseconomies (negative externalities). [1] Under complete markets, pecuniary externalities offset each other. For example ...
The Pigou effect was first popularised by Arthur Cecil Pigou in 1943, in The Classical Stationary State an article in the Economic Journal. [4] He had proposed the link from balances to consumption earlier, and Gottfried Haberler had made a similar objection the year after the General Theory's publication. [5]