Sustainable finance
Pigouvian Tax
A tax set equal to the external cost of an activity, internalising damages so that market prices reflect true social costs.
Definition
A Pigouvian tax is a tax levied on an activity that generates negative externalities, set equal to the marginal external cost at the socially optimal level of activity. Named after economist Arthur Cecil Pigou (1920s), the tax internalises external damage — pollution, congestion, carbon emissions — so that private decisions align with social costs.
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