Pigovian Tax

Description

From the Wikipedia:

"A Pigovian tax (also spelled Pigouvian tax) is a tax levied on a market activity to correct the market outcome, if there are negative externalities associated with the market activity. In the presence of negative externalities, the social cost of a market activity would exceed the private cost of the activity. In such a case, the market outcome is not efficient, and the market would tend to over-supply the product. If a Pigovian tax equal to the negative externality is imposed, the market outcome would be reduced to the efficient amount.

In the presence of positive externalities (public benefits from a market activity), the market would tend to under-supply the product. Similar logic would suggest the creation of Pigovian subsidies to increase the market activity.

Pigovian taxes are named after economist Arthur Pigou who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics." (http://en.wikipedia.org/wiki/Pigovian_tax)