Tag Archives: sin taxes

Pondering health care reform, I began to wonder whether sin taxes would become Pigovian taxes.

A sin tax focuses on the impact of a behavior on an individual. Levied on something that society believes is “bad” for a person, a sin tax typically targets habits like smoking or alcohol consumption. Its goals involve generating revenue and minimizing the behavior. 

By contrast, a Pigovian tax focuses on the impact of a behavior on society. Air pollution, for example, can harm the people who live near a noxious factory. If untaxed, the factory continues producing while society suffers. However, if the factory has to pay when it pollutes, production becomes more expensive.  As a result, the supply of the item decreases and society is compensated.

Have societies with universal health care coverage transformed sin taxes (which relate to the individual) into Pigovian taxes (which impact society)?

The Economic Lesson

First defined by Arthur Pigou (British economist, 1877-1959), a Pigovian tax increases the cost of an activity involving two parties that has a negative impact on a third, unrelated group.  Also called a negative externality, the harm experienced by the third party reflects a failure of the market to price the activity accurately because the market did not account for its cost (harm). When a tax or a fee is imposed, the cost of production increases. Consequently, the item’s supply curve shifts leftward.