Topic summary
Pigovian tax
Extracted from the Wikipedia article Pigouvian tax.
A Pigouvian tax (also spelled Pigovian tax) is a tax on a market activity that generates negative externalities, that is, costs incurred by third parties. It imposes costs corresponding with the externalities, internalizing those costs to improve Pareto efficiency. Ideally, the tax is set equal to the external marginal cost of the negative externalities, in order to correct an undesirable or inefficient market outcome (a market failure).