Pigouvian Taxation

Definition: Compensatory (corrective) tax. This is a tax that is levied on each unit of pollution created by an organization-pollutant equal to the marginal pollution damage at an effective production volume. This tax is levied on the creator of "negative externalities".

The tax is intended to include the public cost in the private cost of the polluter. Its monetary value must be equal to the amount necessary to increase the private cost of polluters to the marginal social costs.