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Arthur Cecil Pigouwas a British economist noted for his studies in welfare economics.
Educated at Kingâs College, Cambridge, Pigou was considered one of Alfred Marshallâs best students. When Marshall retired as a professor of political economy in 1908, Pigou was named as Marshallâs replacement. Pigou was responsible for disseminating many of Marshallâs ideas and thereby provided the leading theoretical basis for what came to be known as the Cambridge school of economics.
Pigouâs most influential work was The Economics of Welfare (1920). In it, Pigou developed Marshallâs concept of externalties, which are the costs imposed or benefits conferred on others that are not accounted for by the person who creates these costs or benefits. Pigou argued that negative externalities (costs imposed) should be offset by a tax, while positive externalities should be offset by a subsidy. In the early 1960s Pigouâs analysis was criticized by Ronald Coase, who argued that taxes and subsidies are not necessary if the partners in the transactionâthat is, the people affected by the externality and the people who cause itâcan bargain over the transaction.
Pigou applied his economic analysis to a number of other problems, including tariff policy, unemployment, and public finance. He also served on the Royal Commission on Income Tax (1919â20) and on two committees on the currency (1918â19; 1924â25).
