Pigovian Tax

AAA

DEFINITION of 'Pigovian Tax'

A special tax that is often levied on companies that pollute the environment or create excess social costs, called negative externalities, through business practices. In a true market economy, a Pigovian tax is the most efficient and effective way to correct negative externalities.

A type of a Pigovian tax is a "sin tax", which is a special tax on tobacco products and alcohol.

INVESTOPEDIA EXPLAINS 'Pigovian Tax'

Pigovian tax is applicable only because market economies often fail to provide a proper incentive to reduce negative externalities. For example, a coal-powered plant may be polluting a nearby river by disposing its harmful byproducts in the river instead of shipping the byproducts to a special facility. A sufficient Pigovian tax would punish this firm economically when it chooses to dispose of the harmful byproducts in the river, creating an incentive to use more environmentally friendly methods of disposal.

RELATED TERMS
  1. Tobacco Tax

    A tax imposed on cigarettes to help pay for healthcare for the ...
  2. Uneconomic Growth

    When economic growth produces negative external consequences ...
  3. Green Economics

    A methodology of economics that supports the harmonious interaction ...
  4. True Cost Economics

    An economic model that seeks to include the cost of negative ...
  5. Social Responsibility

    The idea that companies should embrace its social responsibilities ...
  6. Abatement Cost

    A cost borne by many businesses for the removal and/or reduction ...
RELATED FAQS
  1. How can individuals or businesses handle transaction costs for economic externalities?

    Externalities, also known as external economies, and transaction costs are two significant and evolving issues in contemporary ... Read Full Answer >>
  2. Who developed the theory of economic externality?

    British economist Arthur C. Pigou advanced the theory of economic externalities, which he most notably expressed in his book, ... Read Full Answer >>
  3. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities ... Read Full Answer >>
  4. How is cost basis calculated on an inherited asset?

    Typically, the cost basis on inherited assets is the fair market value as of the time of the decedent's death or actual transfer ... Read Full Answer >>
  5. How does the role of Medicare/Medicaid affect the drugs sector in the U.S.?

    Medicare and Medicaid have enormous influence on the pharmaceutical, or drugs, sector in the United States. For instance, ... Read Full Answer >>
  6. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Sinful Investing: Is It For You?

    Sin stocks may seen outright undesirable to some, but these "naughty" industries bring stable returns - even in hard times.
  2. Mutual Funds & ETFs

    Socially (Ir)responsible Mutual Funds

    Not concerned about being an ethical investor? Maybe "sinful stocks" have a place in your portfolio.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Professionals

    Can Young Workers Rely on Social Security?

    Young savers have time on their hands to take advantage of many investment strategies, and they should because Social Security alone might not be enough.
  5. Economics

    Sacrifices Necessary to Keep Puerto Rico Afloat

    After years of band aids and significant borrowing to meet its obligations, the time has come for meaningful reform in Puerto Rico.
  6. Economics

    Global Impact of China's Geopolitical Strategy

    China's geopolitical strategy is shifting the status quo from the Pacific to the Pentagon. Can the U.S. keep pace with Chinese military innovation?
  7. Economics

    3 Possibilities If Sanctions Against Iran Lift

    What would happen if sanctions against Iran were lifted?
  8. Taxes

    Are You Paying Too Much in Taxes?

    Overpaying taxes amounts to an interest-free loan to the government. Here are some ways to avoid that scenario.
  9. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
  10. Economics

    Understanding Iran Sanctions by the US

    Considering US sanctions have been in place for almost 40 years, and Iran is still considered a troubled region, can we say they have been effective?

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!