Pigovian Tax


Health Economics

  • A tax designed to change behaviour in such a way as to promote the optimal rate of an activity, whether beneficial or harmful. The idea is most commonly met in the context of harmful externalities, when the tax seeks to reduce the activity to the Pareto optimal rate. By analogy, a Pigovian subsidy encourages the rate of activities that generate beneficial externalities. Named for the Cambridge economist Arthur Cecil Pigou (1877-1959).