Costly Behavior

by Elaine Schwartz    •    Mar 24, 2010    •    771 Views

Do you approve of Pigovian taxes?  These are taxes levied on seemingly undesirable behavior in order to compensate for their negative impact on society.

soda tax: Among other municipalities, New York State and Philadelphia are proposing soda taxes.

bag tax:  Implemented in Washington D.C. as of January 1, a five cents tax on plastic bags. 

911 tax:  In Tracy, CA, if you call 911, it will cost you.  Some people are deciding that a cab is cheaper.

elevated library late fees: In San Jose, CA  an overdue library book could cost you 50 cents a day.

The Economic Lesson

Pigovian taxes, named after economist Arthur Pigou (1877-1959), are based on the idea that undesirable behavior creates a cost for society. Therefore, a tax is essentially a “payback”  that offsets the cost and/or minimizes the behavior because it becomes more expensive.  The negative result is also called a negative externality.

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