Pigovian Tax Law and Legal Definition

Pigovian tax is form of tax which is levied on negative externalities that causes pollution to the environment. Pigovian tax is also known as Pigouvian tax. It is also imposed when there are excess social costs caused through negative externalities arising from business practices. Pigovian tax is the most efficient and effective way to correct negative externalities. Pigovian tax is named after the economist, Arthur Pigou who also developed the concept of economic externalities.

Pigovian tax provides incentive to reduce negative externalities. Pigovian tax is also a form of regulation that helps in controlling pollution caused in the market economy. Pigovian tax provides an incentive to reduce pollution, whereas with direct regulation, a polluting company has no incentive to pollute any less than what is allowable.