<P> A Pigovian tax ( also spelled Pigouvian tax ) is a tax on any market activity that generates negative externalities ( costs not included in the market price ) . The tax is intended to correct an undesirable or inefficient market outcome , and does so by being set equal to the social cost of the negative externalities . In the presence of negative externalities , the social cost of a market activity is not covered by the private cost of the activity . In such a case , the market outcome is not efficient and may lead to over-consumption of the product . Often - cited examples of such externalities are environmental pollution , and increased public healthcare costs associated with tobacco and sugary drink consumption . </P>
<P> A Pigovian tax ( also spelled Pigouvian tax ) is a tax on any market activity that generates negative externalities ( costs not included in the market price ) . The tax is intended to correct an undesirable or inefficient market outcome , and does so by being set equal to the social cost of the negative externalities . In the presence of negative externalities , the social cost of a market activity is not covered by the private cost of the activity . In such a case , the market outcome is not efficient and may lead to over-consumption of the product . Often - cited examples of such externalities are environmental pollution , and increased public healthcare costs associated with tobacco and sugary drink consumption . </P>
a pigovian tax must be set equal to
a pigovian tax must be set equal to
the social cost of the negative externalities
the social cost of the negative externalities