Pigovian Tax


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.

BREAKING DOWN '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.

  1. Corporate Social Responsibility

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  2. Tobacco Tax

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  3. Uneconomic Growth

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  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 ...
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