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What is Pigovian Tax?

Pigovian tax

The Government imposes many types of taxes, whether it is house tax, food tax, income tax, and so on. But there is also a tax which is imposed in the industrial sector for manufacturing industries that spoil the surrounding environment for any reason, we call that tax as Pigovian Tax which we also call “Pigouvian tax”. 

The Pigovian tax is equal to the rest of the tax, rather it is more valuable and if someone industry’s owner doesn’t pay it, then the penalty can also be charged on tax because due to some bad effectiveness, many people who live nearby industries have to bear.

Pigovian tax defines

Usually, Pigovian tax is paid by private industries or some other business that unintentionally create bad environments by doing business activities and the chemicals that are in those business activities make the surrounding environment unhygienic. This tax is obtained by negative externalities which are the part of market transactions.

Suppose, there is a manufacturing industry that manufactures plastic bags and we all know that burned plastic bags are very harmful and its pollution badly affects the people around the industrial area. Due to this people also have many diseases like asthma, skin disease, etc. In simple words, we can say that it is the effect that damages the outsiders.

 It is responsible for the producers of goods or services that make them using many types of chemicals.

It’s not that only the chemical industry sector pays the Pigovian tax for their negative impact on living things and non-living things, rather any other person who spreads pollution and causes harm to others. We explain this Pigovian tax with an example:

Pigouvian tax examples

Suppose, a person who drives a car, the pollution that comes out from the car that causes bad harms to the nearby people and those factories who manufacture plastic or paper bags, here carbon tax is charged.

Suppose a person who smokes can cause many diseases to the people around them such as lung problems, asthma, etc. so the government imposes Pigovian tax on those factories that produce cigarettes, tobacco.

These are some examples that show what things this Pigovian tax is levied on.

Some important points

  • Bad effect on living things as well as Non-living things.
  • The motive of the Pigovian tax is to earn money for those peoples who suffer from the pollution and get majorly affected.
  • These pollutants harm both the workers of the factories and the people around the factory.
  • This Pigovian tax compensates all those people who have become victims of disease due to the pollination of these factories.
  • People are affected by many diseases such as cancer, asthma, lungs, liver damage caused by the pollution that comes out from factories.
  • This tax is included in the Private cost of companies.

Sometimes, users are also responsible for these types of pollution such as people use plastic bags or paper bags for goods or services but they misuse these polybags as they burn them to destroy them. So that’s why people are also able to fill Pigovian tax along with factories.

It’s not that the Pigovian tax is charged for air pollution, rather it is charged for water pollution, noise pollution. Examples:

Water pollution: Water pollution occurs from factories because chemicals come out from factories and water can absorb this pollution and due to this, fish and other aquatic animals get harm.

Noise pollution: Noise pollution occurs from vehicles, parties, and due to this, ears of people and animals are harmed.

Optimal Pigouvian tax

You know what pigouvian tax effect on three activity:

So these activities count as a crucial part of every manufacturer company which includes high cost. 

Ok, we give you an example if the government charges a pigovian tax on negative externalities which contain social activity of pollution, it affects on goods or sevices by increasing marginal cost of production. That’s why the optimal pigouvian tax includes marginal social cost of pollution.

Pigouvian Subsidy

Pigouvian subsidy is the efficient level of output from positive externalities which shows the advantages for those people who are not the reasons for negative externalities.

So basically pigouvian tax is created from citizens according to the income and these tax is transferred into the public account for public services.

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