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Pigouvian tax

📈 Economics By CampusDown Wiki Editorial Team Last updated
A Pigouvian tax charges activities that impose costs on others (negative externalities) by roughly the external cost, so markets reach the socially optimal level.
Contents
  1. 1. Overview
  2. 2. Frequently asked questions
  3. 3. References

Overview

Proposed by Pigou in *The Economics of Welfare* (1920): set the tax equal to marginal external cost at the optimum to internalise the externality; subsidies work for positive externalities. Examples include carbon taxes, tobacco taxes and congestion charges. Coase (1960) showed bargaining can work when transaction costs are low. Measuring external cost and regressivity are challenges.

Frequently asked questions

How does it differ from ordinary taxes?
Its main aim is changing behaviour.

References

  1. Pigou, A. C. (1920). The Economics of Welfare. Macmillan.
  2. Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44.
  3. Baumol, W. J. (1972). On taxation and the control of externalities. American Economic Review, 62(3), 307–322.

Reports and materials that use this theory (Korean)

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ExternalityExternalities explained: positive and negative externalities, market failure from the gap between private and social cost, Pigouvian taxes and subsidies, the Coase theorem, regulation and emissions trading.📈 EconomicsCarbon neutralityWhat carbon neutrality or net zero means, the IPCC 1.5°C findings, the Paris Agreement, Korea’s 2022 Carbon Neutrality Act and 2030 target, tools, and greenwashing concerns.📈 EconomicsPublic goodWhat a public good is in economics, non-rivalry and non-excludability, examples, the free-rider problem and market failure, the four types of goods, and the tragedy of the commons.📈 EconomicsTransaction cost economicsTransaction cost economics explains why firms exist and what they make or buy, focusing on the costs of searching, bargaining, contracting and monitor💼 Business

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This article was last updated on October 24, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.