What is the meaning of Pigouvian tax?

What is the meaning of Pigouvian tax?

A Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes.

How is Pigou tax computed?

In the ideal world, the Pigouvian tax will be imposed at an amount equal to the costs associated with the negative externality. When Pigouvian taxes are imposed, the supply of the economic activity producing the negative externality will decrease.

What is Pigou approach?

The Pigou effect refers to the relationship between consumption, wealth, employment, and output during periods of deflation. The Pigou effect states that when there is deflation of prices, employment (and thus output) will increase due to an increase in wealth (which increases consumption).

What is corrective tax?

A corrective tax is a market-based policy option used by the government to address negative externalities. Taxes increase the cost of producing goods or services generating the externality, thus encouraging firms to produce less output.

Which of the following is an example of a Pigouvian tax?

A gasoline tax is an example of a Pigouvian tax. It raises the driver’s cost to cover the negative externalities created by driving automobiles. In the United States, the federal gas tax was $0.183 per gallon in 2019.

What did AC Pigou recognize about taxes on externalities?

Understanding a Pigovian Tax According to Pigou, negative externalities prevent a market economy from reaching equilibrium when producers do not take on all costs of production. This adverse effect might be corrected, he suggested, by levying taxes equal to the externalized costs.

What is the main contribution of Pigou in the history of economic thought?

Pigou’s most enduring contribution was The Economics of Welfare, 1920, in which he introduced the concept of externality and the idea that externality problems could be corrected by the imposition of a Pigovian tax (also spelled “Pigouvian tax”).

What did Arthur Pigou do?

Pigou, a British economist, is best known for his work in welfare economics. In his book The Economics of Welfare Pigou developed alfred marshall’s concept of externalities, costs imposed or benefits conferred on others that are not taken into account by the person taking the action.

How did Pigou define economic welfare?

He, therefore, defines economic welfare as “that part of social (general) welfare that can be brought directly or indirectly into relation with the measuring rod of money.” Thus economic welfare, in the Pigovian sense, implies the satisfaction of utility derived by an individual from the use of exchangeable goods and …

How do corrective taxes differ from most taxes?

How Do Corrective Taxes Differ From Most Taxes? It is not possible to divide corrective taxes between the buyer and seller. Taxes on corrective actions do not increase government revenue. Deadweight loss is caused by corrective taxes.

What is an Internality in economics?

An internality is the long-term benefit or cost to an individual that they do not consider when making the decision to consume a good or service.

Who is in the Pigou Club?


Members Date of induction Description
Jim Barrett April 1, 2000 Economist
Bruce Bartlett May 15, 2017 Historian of Economics
Yoram Bauman April 1998 Economist
Gary Becker June 17, 2006 Economist

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