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MENTAL MODEL · M3283

Pigouvian Tax

Pigouvian Tax
BusinessHigh supportPublic Economics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

A tax scheme proposed by Arthur Pigou to address negative externalities. It imposes a tax on activities that generate negative externalities, equal to their marginal external cost, so that private cost equals social cost, thereby correcting market failure and achieving social optimum.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

A tool for internalizing externalities. It provides a theoretical basis for solving environmental problems through taxation. In policy-making, it supports the design of environmental tax policies such as carbon taxes and pollution taxes, guiding enterprises and individuals to reduce pollution through price signals.

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A Pigouvian tax imposes a tax on negative externalities (such as pollution), making private costs internalize social costs, so that prices reflect true costs, thereby reducing output to the social optimum. For positive externalities, a subsidy is used.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Pigouvian_taxZH · Explicit
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