Pigouvian taxes are taxes designed to correct for negative external effects. The idea is originally due to Pigou (1920), and has received increased attention in recent years because of the concern with environmental issues. This article sets out the basic theoretical argument and considers the modifications of the theory that have to be made when these taxes are seen in the context of an otherwise distortionary tax system. It also briefly considers the issue of the ‘double dividend’ from a green tax reform.
Distortionary tax Double dividend Externalities Lump sum taxes Marginal cost of public funds Optimal taxation Partial equilibrium Payroll tax Pigou, A. C. Pigouvian taxes Ramsey tax Substitutes and complements Tax base Tax wedge
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