Pigouvian taxes, named in honor of British economist Arthur Pigou, are taxes intended to correct negative externalities.
In their activity, companies can produce negative externalities such as pollution. These negative externalities affect the welfare of other interest groups. Therefore, following Pigou’s thesis, the state must contribute to protecting the common good by establishing taxes for those companies that deteriorate the well-being of citizens.
The effect of the tax is to ensure that the private marginal cost (what it costs the company to produce) plus the tax, is equal to the social marginal cost (what it costs the company, including the company, to produce).
Arguments in favor of Pigouvian taxes
- They do not cause losses in the efficiency of the markets, since it internalizes the costs of externality to producers or consumers.
- There are many countries that have established this kind of taxes. These taxes are aimed at solving so-called market failures, such as pollution (such as carbon tax), or the tobacco problem.
Arguments against Pigouvian taxes
Below are the most important arguments against Pigouvian taxes:
- It is not clear that they are quite fair:They can tax pollution even before it occurs.
- Diversity of opinions on the harm function:The marginal cost of externality is difficult to calculate from an economic point of view, as well as the social costs involved.
- Problems with stable and shared legislation:Taxes may be incompatible with current regulations and adaptation would cost.
- It is difficult to define who is the issuing agent and the substance to be assessed:The effects of polluting substances cannot always be isolated and work is planned.
- Disparity of criteria on how to use the funds raised:You can re-invest in the pollutant sector to make it more attractive or they can be used for environmental policies.