<P> A Pigovian tax ( also spelled Pigouvian tax ) is a tax levied on any market activity that generates negative externalities ( costs not internalized in the market price ) . The tax is intended to correct an 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 . An often - cited example of such an externality is environmental pollution . </P>
<P> A Pigovian tax ( also spelled Pigouvian tax ) is a tax levied on any market activity that generates negative externalities ( costs not internalized in the market price ) . The tax is intended to correct an 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 . An often - cited example of such an externality is environmental pollution . </P>
pigouvian or sin taxes are placed on goods that
pigouvian or sin taxes are placed on goods that
market activity that generates negative externalities
market activity that generates negative externalities