A book written by Arthur Pigou that became a subject of critique by John Maynard Keynes in his work, 'The General Theory of Employment, Interest and Money'.

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Arthur Pigou (1877–1959) was an English economist whose work is foundational to welfare economics. He is best known for proposing the concept of externalities and the corrective taxes, now known as Pigouvian taxes, designed to address them.

Arthur Pigou (1877–1959)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

A Pigouvian tax, named after economist Arthur Pigou, is a tax on activities creating negative external effects. The concept went largely unrecognized until the 1960s but has since become a key policy tool for mitigating pollution and environmental damage. The tax is designed to correct inefficient market outcomes by making producers internalize the true social costs of their actions.

Pigouvian Tax (Definition)

This 1912 book by Arthur Pigou was a significant work in labor economics, earning high praise from economist Joseph Schumpeter. It importantly provided the conceptual foundation for Pigou's subsequent work, 'The Economics of Welfare.'

Book: Wealth and Welfare by Arthur Pigou (1912)

Arthur Pigou, a key figure in welfare economics, argued that a society's welfare cannot be measured solely by its financial output. He proposed a broader framework that incorporates non-monetary factors essential to human wellbeing, such as political liberties and an individual's sense of social standing. This perspective challenges the adequacy of purely economic indicators like national income in assessing overall societal progress.

Pigou's Focus on Broader Measures of Wellbeing

Arthur Pigou's rationale for government intervention is based on the market failures caused by externalities. He argued that when externalities exist, they create a divergence between the private costs or benefits considered by an individual or firm and the total costs or benefits experienced by society. This discrepancy leads to an inefficient allocation of resources, which necessitates intervention to realign private incentives with social welfare.

Pigou's Rationale for Intervention in Case of Externalities

Despite a shared intellectual background as heirs to Alfred Marshall's school of economics, economists Arthur Pigou and John Maynard Keynes had significant disagreements and engaged in mutual criticism. A key example is Keynes's critique of Pigou's 'The Theory of Unemployment' within his 'General Theory', which was met with a critical response from Pigou.

Intellectual Disagreement between Keynes and Pigou

A bibliographic reference is made to 'The Economics of Welfare,' a book by Arthur Pigou. It was published in London by Macmillan & Co. The work was originally released in 1920 and a later edition was published in 1932.

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