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. Utilitarianism

    A philosophy that bases the moral worth of an action upon the ...
  4. Nonrenewable Resource

    A resource of economic value that cannot be readily replaced ...
  5. Corporate Social Responsibility

    Corporate initiative to assess and take responsibility for the ...
  6. Abatement Cost

    A cost borne by many businesses for the removal and/or reduction ...
Related Articles
  1. Sinful Investing: Is It For You?
    Investing Basics

    Sinful Investing: Is It For You?

  2. Socially (Ir)responsible Mutual Funds
    Mutual Funds & ETFs

    Socially (Ir)responsible Mutual Funds

  3. Cyclical Versus Non-Cyclical Stocks
    Options & Futures

    Cyclical Versus Non-Cyclical Stocks

  4. What is a
    Investing

    What is a "socially responsible" mutual ...

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center