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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.
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.
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.
The Downs–Thomson paradox (named after Anthony Downs and John Michael Thomson), also known as the Pigou–Knight–Downs paradox (after Arthur Cecil Pigou and Frank Knight), states that the equilibrium speed of car traffic on a road network is determined by the average door-to-door speed of equivalent journeys taken by public transport or the next best alternative.
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 ...
A pecuniary externality occurs when the actions of an economic agent cause an increase or decrease in market prices. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to buy a house.