Pigouvian Tax
About Pigouvian Tax
A Pigouvian tax, named after economist Arthur Pigou, is a tax on activities that generate negative externalities. The classic example is a tax on pollution. A Pigouvian tax corrects the market failure by making polluters pay the social cost of their activity. Carbon taxes are the most prominent modern Pigouvian tax. Congestion charges in London and Stockholm are Pigouvian taxes on traffic. Sugar taxes are Pigouvian taxes on unhealthy consumption. The challenge with Pigouvian taxes is determining the correct tax rate, which requires measuring the externality. Pigouvian taxes can generate revenue that can be used to reduce other taxes, as in British Columbia, or to fund related programs, as when tobacco taxes fund health care.
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