From Envirowiki

Pigovian taxes are taxes that are meant to correct the detrimental effects of negative externalities on society and the environment (Mankiw). Pigovian taxes are used most frequently with issues of pollution. While at first it might seem counter-intuitive (and even immoral) to allow any amount of pollution, the simple fact is that within the capitalist system, A lot of types of pollution cannot be completely eliminated (Chlorofluorocarbons are an exception)^{[reference needed]}.

That said, the two main options of a government to limit pollution at a socially optimum level are to either directly regulate the quantity of pollution, or to levy taxes. Interestingly, while regulation has historically been more common, it also carries more inefficiency. Because taxation of negative externalities allows for an economic incentive to reduce pollution, those firms who can efficiently reduce their pollution will, and those who cannot afford to reduce pollution will pay the tax. In theory at least, Pigovian taxes allow for an efficient distribution of pollution amongst firms. In addition, as compared to strict regulation, Pigovian taxes derive revenue for the government (Mankiw). The revenue raised can be put into a rebates for non-polluting companies in the same industry, speeding up change to more efficient, less polluting industries (See feebates).

While the ideal would be to find efficient ways for firms and corporations to eliminate their pollution, in reality, we should push for Pigovian taxes that internalize the market externalities of pollution.

One example of a current use of Pigovian taxation is carbon emissions in an attempt to slow to process of global warming. A Carbon Tax is a tax that is placed on the usage of high carbon-content fuels such as fossil fuels. This indirect tax aims to reduce the amount of carbon emitted into the environment to an acceptable level (often cited at 550ppm).

[edit] sources

• Mankiw, N. Gregory. Principles of Microeconomics. 2nd ed. Orlando, FL: Harcourt College , 2001.