Pigou effect

Abstract: Economists have long favored the use of taxes as instruments of environmental protection. Many economic analysts assert that in situations involving serious externalities taxes are the most effective mechanism for “getting the prices right” -- that is, for helping prices closely approximate marginal social costs. The notion that taxes can improve welfare outcomes by internalizing externalities traces back at least as far as Pigou (1938) and is a central tenet of environmental economics.

Abstract: Arguments for social interference developed by Pigou and Graham illustrate common misinterpretations of the meaning of cost and its variation with output, 582. — I. The private owner of a natural opportunity secures maximum return from it by charging that rent which halts the application of investment at the point which is socially most advantageous, 584. — II. The notion of decreasing cost is a fallacy; competitive price fixation under decreasing cost or increasing returns an impossible situation, 592. — III. The law of comparative advantage in international trade is fundamentally sound, 599. — Importation a method of using resources to produce the imported good, and will be employed under competitive conditions only when more efficient than a direct method, 603. — The competitive system has important defects, but they lie outside the mechanical theory of exchange relations, 605.

Abstract: It has become traditional for reviewers of important books to begin by saying that it is impossible within the limits of a single article to do more than consider very briefly a few of the questions at issue. Such a statement would assuredly be justified in the present case, for in this book Mr. Keynes attacks one of the fundamental assumptions which has underlain orthodox theory since the days of Ricardo. This is the doctrine which used to be expressed categorically in the phrase “Supply creates its own demand.” Later writers have been more guarded on the subject, and often refrained from stating it specifically in any form at all. But however it might be expressed or implied, orthodox theory has continued to be based on the principle that “what constitutes the means of payment for commodities is simply commodities”1 (Mill); from which it follows (inter alia) that money makes no difference except frictionally, that consumption is limited by production and not vice versa that general oversupply is impossible, and that, to quote Professor Pigou, unemployment is due to the fact that “frictional resistances prevent the appropriate wage adjustments from being made instantaneously.” In place of this Mr. Keynes seeks to substitute a monetary theory of production according to which unemployment may be due, not to labor’s refusal to accept a lower reward, but to a deficiency of “effective demand.”

Abstract: The results of Samuelson [5-7] in the theory of public goods have provided the basis for most subsequent discussion of the optimum provision of public goods. Samuelson showed that a necessary condition for Pareto Optimality (and hence for maximizing a social welfare function which responds positively to individual utilities) is that the sum of the marginal rates of substitution (E MRS) between a public good and a private good be equal to the marginal rate of transformation (MRT). The sole constraint is that production is in the aggregate production set. This optimum can be achieved as a competitive equilibrium with the government supplying the public good up to the point where I MRS = MRT and financing its production by lump-sum taxation. Lump-sum transfers may also be employed to achieve the appropriate income distribution. The achievement of the " full " optimum described above depends on lump-sum taxes and transfers being feasible. If the taxation tools available exclude lump-sum taxation, then the optimization problem must be modified to include explicitly the means by which government revenue is raised. The importance of this point was clearly recognized by Pigou [3], who argued that the cost to consumers of the public good would be larger than just the necessary resources on account of the " indirect " damage caused by taxation: