Q. Consider the following statements regarding “Pigovian Tax”:
1. It is a tax placed on any good which creates negative externalities.
2. Carbon tax is an example of Pigovian Tax.
Which of the following codes below given is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: C
Notes:

A Pigovian tax is a tax placed on any good which creates negative externalities.

  • The aim of a Pigovian tax is to make the price of the good equal to the social marginal cost and create a more socially efficient allocation of resources.
  • It is named after the economist Arthur Pigou who developed the concept of externalities in the 1920s.
  • A carbon tax aims to make individuals and firms pay the full social cost of carbon pollution.
  • In theory, the tax will reduce pollution and encourage more environmentally friendly alternatives.

Source: Source