Pigovian tax  

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Train wreck at Montparnasse (October 22, 1895) by Studio Lévy and Sons.
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Train wreck at Montparnasse (October 22, 1895) by Studio Lévy and Sons.

A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that generates negative externalities (costs not included in the market price). The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption.

In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of a Pigovian subsidy to make the users pay for the extra benefit and spur more production.

Pigovian taxes are named after English economist Arthur Pigou (1877–1959) who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics in 1972.

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Unless indicated otherwise, the text in this article is either based on Wikipedia article "Pigovian tax" or another language Wikipedia page thereof used under the terms of the GNU Free Documentation License; or on original research by Jahsonic and friends. See Art and Popular Culture's copyright notice.

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