Pigouvian tax

A Pigouvian tax is an economic tool designed to correct for negative externalities, which are costs imposed on third parties not involved in a transaction. For example, pollution from a factory harms the environment and public health, but the factory and its customers do not directly pay for these damages.12

British economist Arthur Pigou proposed that taxing such activities would make producers and consumers bear the full cost of their actions, a concept known as "internalizing an externality". This tax aims to reduce the production or consumption of goods or services that generate negative externalities, leading to more efficient market outcomes. A common example is a carbon tax, which aims to offset the societal costs of carbon dioxide emissions.12