Pigouvian Tax: Correcting Negative Externalities
A Pigouvian tax, named after economist Arthur Pigou, is a tax levied on activities that generate negative externalities. The goal is to correct an inefficient market outcome where the price of a good or service is too low because it fails to reflect its true social cost. By raising the price, the tax forces decision-makers, whether they are producers or consumers, to internalize the external cost. This adjustment ensures they account for the full marginal social cost of their actions, which creates an incentive to reduce the activity to a more socially optimal level.
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The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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