Pigovian taxes

Pigovian taxes are charges imposed on activities that generate negative externalities—costs not reflected in market prices, such as pollution. They aim to correct market outcomes by aligning private costs with societal costs. For example, a tax on carbon emissions incentivizes companies to reduce pollution, encouraging more environmentally friendly behavior. By making polluters pay for the broader social impact of their actions, Pigovian taxes promote healthier, more sustainable economic activities without banning them altogether.