Wednesday, May 5, 2010

Today's Term: Pigovian Tax

Pigovian/Pigouvian Tax is a unique tax that is levied on the activity of the market/companies that create negative externalities in the environment.
It might be that a certain company creates excess social costs, or produces goods that may be injurious to health(tobacco and alcohol) or pollutes the nearby river. In this case, a Pigovian Tax imposed on such companies will create a dis-incentive for the company to engage in the above activities.
A pigovian tax has been traditionally the most efficient and effect way to correct negative externalities.
Interesting links point to the Pigou Club, ‘an elite group of pundits and policy wonks with the good sense to advocate higher Pigovian taxes’ started by Greg Mankiw, where he supports the cause for pigovian taxes (for gasoline in this case) in the Pigou Club's manifesto :

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

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