Pigou, Consumption and the Carbon Tax

The reclusive British economist Arthur Pigou developed a concept for a social tax that taxes negative externalities of market factors (i.e. external factors that negatively impact members of a society). The concept is now known as the Pigovian tax (also spelled Pigouvian)

It seems like a sensible idea as it in essence provides a disincentive to creators of harmful or 'bad' products of services to find new avenues for revenue generation.

So, how does it work? Essentially, a Pigovian tax can help remedy a negative externality, providing incentive to the creator of the negative externality (e.g. a polluting manufacturer) to change their behavior for the benefit of society. Pigou believed that taxing negative economically based behaviour would result in a reduction of that behaviour or activity and as a consequence, society would benefit. For example, if polluters are taxed, in theory they will reduce their pollution output.

So, given carbon production has a negative societal impact, why aren’t we talking about carbon tax as a social tax and a benefit rather than a cost?

Well, the answer can be found within the following: When implementing a Pigovian tax, it is difficult to avoid interfering with personal choice or setting the price just ‘right’.  Anything that hurts profits (even those of declining industries) or infringes personal choice is problematic. If you need evidence of this, just have a look at the tobacco industry and its consumer base.