Sustainable finance
Pigouvian Tax
Definition
A Pigouvian tax is a tax levied on an activity that generates negative externalities, set equal to the marginal external cost at the socially optimal level of activity. Named after economist Arthur Cecil Pigou (1920s), the tax internalises external damage — pollution, congestion, carbon emissions — so that private decisions align with social costs.
References
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This reference provides supporting context for how “Pigouvian Tax” is defined and used.
Overview
How it is used
The concept anchors environmental tax theory, cost-benefit appraisal and the "polluter pays" principle; it frames debates comparing carbon taxes with emissions trading and subsidies.
Why it matters
Pigou's insight — that unpriced damage is uncontrolled damage — remains the core economic argument for carbon pricing and environmental taxation worldwide.