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Social-Ecological Systems Meta-Analysis Database: Theory

Pigouvian taxes

Variable relationship:

In the context of the SESMAD project, a pigouvian tax is one that is designed to internalize negative externalities associated with environmentally harmful activities. These can include either natural resource degradation or pollution, although usually the context is a case of environmental pollution and the "polluter pays principle" is evoked. The tax is levied on targets in proportion to their contribution to the environmental problem via the negative externalities that they impose on society. The theory of pigouvian taxation comes from standard environmental economics (see Kolstad 2000), and thus involves the standard logic of marginalist thinking, and the notion that the amount of the tax can and should be set at a precise level (the social marginal cost of the externality involved) in order to achieve a social optimum (and in many cases an "optimal" amount of pollution). In practice it is difficult to meaningfully measure the concepts involved to accomplish this. But it is accurate to say that the theory would predict that a tax (Policy Instrument) will effectively internalize the externalities involved and thereby improve the condition of the commons (Commons Condition Trend). As other tax-based instruments, low cost (Transaction Cost), monitoring, and sanctioning (External Monitoring; External Sanctions) are critical for the instrument to be effective.

Pigouvian subsidies are also sometimes mentioned in the literature that discusses pigouvian taxation, and in contrast, are designed to increase the production of socially and environmentally benefical positive externalities.

Scientific Field
Component Type(s)


VariableRoleRole ExplanationValue
Policy instrumentProximate independent variableA tax is a standard type of policy instrument designed to alter incentives and encourage more pro-social and pro-environmental behaviors and outcomes.Tax
External sanctionsModerating independent variableSanctions in case of rule violation encourage polluters to pay the taxesYes
External monitoringModerating independent variableTax collection has to be monitored to guarantee that polluters pay for the social costs they createYes
ComplianceModerating independent variableonitoring and sanctioning can enable the compliance needed to ensure that the tax is effective.Yes
Transaction costsModerating independent variableFor this policy tool to be effective the transaction costs of its implementation (from calculation of the tax to its enforcement) have to be relatively low. The lower the transaction costs the more beneficial the taxes.Low
Commons condition trendFinal outcomeIf the negative externalities are internalized as a result of the tax on the activities that generate them, the prediction would be that the state of the environment would improve.Remained the same or Improved

Related Theories

TheoryRelationshipCharacterizing Variables

Related Studies


Kolstad, C. 2000. Environmental Economics. Oxford University press, Oxford, UK.