Pigouvian taxes are taxes imposed on goods or activities that have negative externalities (unintended costs imposed on third parties), with the goal of reducing their consumption and correcting market failures.
Think of Pigouvian taxes as fines for bad behavior. When people engage in activities that harm others (like excessive pollution), they have to pay extra money as a way of discouraging those actions.
Negative Externalities: Negative externalities occur when the production or consumption of a good imposes costs on third parties who are not involved in the transaction.
Social Cost/Benefit Analysis: Social cost/benefit analysis is an economic tool used to evaluate whether certain policies or projects provide overall benefits to society by comparing their total costs and benefits.
Coase Theorem: The Coase theorem states that if property rights are well-defined and transaction costs are low, private parties can negotiate and find efficient solutions to externalities without government intervention.
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