The Pigou Problem

Abstract

This article calls into question the Pigovian justifications for higher taxes on goods and services that generate negative externalities. Insisting on a Pigovian tax as a precautionary measure only makes sense if it replaces all preexisting subsidies, taxes, and regulations rather than being added on top of existing arrangements. The relevant issue is whether the activities causing the externality are at their socially optimal level.

Keywords: Pigovian tax, Pigou, taxation, tax, externalities, externality, transfers, regulation, global warming, pollution, gasoline, coase,

JEL Classification: D00, D6, D62, H00, H2, H20, H21, H23