Definition of Pigovian tax:
The Pigovian tax is meant to discourage activities that impose a cost of production onto third parties and society as a whole. 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. Ideally, the tax would be equivalent to the external damage caused by the producer and thereby reduce the external costs going forward.
A Pigovian (Pigouvian) tax is a tax assessed against private individuals or businesses for engaging in activities that create adverse side effects for society. Adverse side effects are those costs that are not included as a part of the product's market price. These include environmental pollution, strains on public healthcare from the sale of tobacco products, and any other side effects that have an external, negative impact. Pigovian taxes were named after English economist, Arthur Pigou, a significant contributor to early externality theory.
A way of correcting for negative externalities, or consequences for society, arising from the actions of a company or industry sector, by levying additional taxes on that company or sector. An example would be higher taxes on tobacco products, or taxes put in place for polluting power companies.
How to use Pigovian tax in a sentence?
- Economists argue that the cost of these negative externalities, such as environmental pollution, are borne by society rather than the producer.
- A Pigovian tax is intended to tax the producer of goods or services that create adverse side effects for society.
- A carbon emissions tax or a tax on plastic bags are examples of Pigovian taxes.
- The purpose of the Pigovian tax is to redistribute the cost back to the producer or user of the negative externality.
- Pigovian taxes are meant to equal the cost of the negative externality but can be difficult to determine and if overestimated can harm society.
Meaning of Pigovian tax & Pigovian tax Definition