The Concise Encyclopedia of Economics

Arthur Cecil Pigou

Arthur C. Pigou, a British economist, is best known for his work in welfare economics. In his book The Economics of Welfare Pigou developed Alfred Marshall's concept of externalities (see Public Goods and Externalities), costs imposed or benefits conferred on others that are not taken into account by the person taking the action. He argued that the existence of externalities was sufficient justification for government intervention. The reason was that if someone was creating a negative externality, such as pollution, he would engage in too much of the activity that generated the externality. Someone creating a positive externality, say, by educating himself and making himself more interesting to other people, would not invest enough in education because he would not perceive the value to himself as being as great as the value to society.

To discourage the activity that caused the negative externality, Pigou advocated a tax on the activity. To encourage the activity that created the positive externality, he advocated a subsidy. These are now called Pigovian taxes and subsidies.

Pigou's analysis was accepted until 1960, when Ronald Coase (see Coase) showed that taxes and subsidies were not necessary if the people affected by the externality and the people creating it could easily get together and bargain. Adding to the skepticism about Pigou's conclusions is the new view, introduced by public choice economists (see Public Choice Theory), that governments fail just as markets do. Nevertheless, most economists still advocate Pigovian taxes on pollution as a much more efficient way of dealing with pollution than government-imposed standards.

Pigou studied economics at Cambridge and lectured at Cambridge until World War II. In 1908 he was appointed to Marshall's chair in economics at the age of thirty. Pigou taught straight Marshallian economics, often insisting to his students that "it's all in Marshall." (See Principles of Economics, by Alfred Marshall.) Pigou was throughout his life an avid free trader.

Selected Works

The Economics of Welfare, 4th ed. 1932.

Keynes's General Theory: A Retrospective View. 1950.

The Political Economy of War. 1921.

The Theory of Unemployment. 1933.

Unemployment. 1914.

Wealth and Welfare. 1912.

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