What type of tax is intended to correct an inefficient market outcome by being set equal to the marginal external cost at the socially efficient level of activity?
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Pigovian tax
Named after British economist Arthur Cecil Pigou, this tax aims to internalize "externalities" by making the private cost of an activity reflect its true cost to society. Unlike most taxes that discourage productive work or investment, a Pigovian tax actually improves market efficiency by reducing harmful behaviors like pollution. A classic modern example is the carbon tax, which charges companies for the environmental damage caused by their greenhouse gas emissions.
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- What term describes a tax set equal to the social cost of a negative externality to address market inefficiency?