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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]
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 ]
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.
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 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]
This idea influenced Marshall's pupil Arthur Pigou's ideas on taxing negative externalities. [70] Pigou wrote an essay in favor of the land value tax, calling it "an exceptionally good object for taxation." His views were interpreted as support for Lloyd George's People's Budget. [71]
There’s a reason financial experts also call your emergency fund your sleep-well-at-night money. Knowing you have at least some cash buffers to protect your finances from tougher economic times ...
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.