Pigouprincipe

The Pigou principle, also known as the Pigouvian principle, is a concept in welfare economics stating that when an economic activity imposes a cost on third parties (a negative externality), private market outcomes are inefficient because producers do not bear the full social cost. A corrective tax or charge should be imposed equal to the marginal external damage to internalize the externality and align private incentives with social efficiency. The principle is named after Arthur Cecil Pigou, who developed it in The Economics of Welfare (1920). In German-language literature it is referred to as das Pigou-Prinzip.

Mechanism and implications: The corrective tax raises the private cost of production until social marginal cost equals social marginal benefit, reducing the quantity toward the socially optimal level. In theory, the tax should equal the marginal damage caused by an additional unit of output at the social optimum. Revenue from such taxes can be used to fund mitigation or be redistributed. The principle also extends to positive externalities, where a Pigouvian subsidy encourages the beneficial activity by aligning private incentives with the social value.

Relation to other ideas: The Pigou principle contrasts with the Coase theorem, which argues that private bargaining can internalize externalities under certain conditions without government intervention. In practice, estimating external costs, administrative feasibility, and distributional concerns limit the use of Pigouvian taxes. Critics also point to dynamic responses, imperfect enforcement, and potential unintended consequences, underscoring the role of policy design and complementary measures.