Pigovian taxes
Pigovian taxes are taxes imposed on activities that generate negative externalities, which are costs not reflected in the market price. For example, pollution from a factory can harm the environment and public health, but the factory may not bear the full cost of this damage. A Pigovian tax aims to correct this market failure by making the polluter pay for the external costs, encouraging them to reduce harmful activities.
By increasing the cost of undesirable actions, Pigovian taxes incentivize businesses and individuals to adopt more environmentally friendly practices. This approach can lead to a more efficient allocation of resources and promote social welfare by reducing the overall negative impact on society.