The Pigovian Tax

A Pigovian tax is a charge imposed on activities that generate negative externalities—costs not reflected in market prices, like pollution. The goal is to make producers or consumers consider these hidden costs, encouraging them to reduce harmful behaviors. For example, taxing carbon emissions incentivizes companies to lower pollution levels. This tax aligns private costs with social costs, promoting more efficient outcomes and helping address environmental or public health issues caused by certain economic activities.