page_title: Public economics
section_title: Pigouvian taxes
hierarchical_section_title: Public economics / Taxation / Pigouvian taxes
caption_attribution_description: English: The economist A.C. Pigou.
context_page_description: Public economics is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare.
  Public economics provides a framework for thinking about whether or not the government should participate in economic markets and to what extent it should do so. Microeconomic theory is utilized to assess whether the private market is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government taxation and expenditures.
  This subject encompasses a host of topics including market failures, externalities, and the creation and implementation of government policy.
  Broad methods and topics include:
  the theory and application of public finance
  analysis and design of public policy
  distributional effects of taxation and government expenditures
  analysis of market failure and government failure.
  Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence, optimal taxation, and the theory of public goods.
context_section_description: One of the achievements for which the great English economist A.C. Pigou is known, was his work on the divergences between marginal private costs and marginal social costs (externalities). In his book, The Economics of Welfare (1932), Pigou describes how these divergences come about:
  ...one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally also renders services or disservices to other persons (not producers of like services), of such a sort that payment cannot be extracted from the benefited parties or compensation enforced on behalf of the injured parties (Pigou p. 183).
  In particular, Pigou is known for his advocacy of what are known as corrective taxes, or Pigouvian taxes:
  It is plain that divergences between private and social net product of the kinds we have so far been considering cannot, like divergences due to tenancy laws, be mitigated by a modification of the contractual relation between any two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties. It is, however, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes (Pigou p. 192).
  Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms. Positive externalities are education, public health and others while examples of negative externalities are air pollution, noise pollution, non-vaccination and more. The government can intervene in the market, using an emission tax for example to create a more efficient outcome; this Pigouvian tax is the optimal policy prescription for any aggregate, negative externality.
  Pigou describes as positive externalities, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes negative externalities, such as the factory that destroys a great part of the amenities of neighboring sites.
  In 1960, the economist Ronald H. Coase proposed an alternative scheme whereby negative externalities are dealt with through the appropriate assignment of property rights. This result is known as the Coase theorem.
caption: A.C. Pigou (1877-1959).
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