Arthur Cecil Pigou

Definition

Arthur Cecil Pigou was a British economist known for his work on welfare economics and the concept of externalities, particularly in relation to market failures. His theories built upon the ideas of Alfred Marshall and the Cambridge School, emphasizing the role of government intervention to correct inefficiencies in the economy caused by external costs and benefits.

5 Must Know Facts For Your Next Test

1. Pigou's most influential work is 'The Economics of Welfare,' published in 1920, where he introduced concepts of social cost and welfare.
2. He argued that government intervention is necessary to correct market failures caused by externalities, promoting policies such as taxes and subsidies.
3. Pigou's ideas influenced the development of environmental economics, particularly regarding pollution control and resource management.
4. He introduced the concept of the Pigovian tax as a method for addressing negative externalities, encouraging individuals and businesses to internalize the costs of their actions.
5. Pigou's work provided a theoretical framework that helped establish the importance of measuring social welfare and evaluating economic policies based on their impacts on society.

Review Questions

• How did Pigou build upon Alfred Marshall's ideas within the Cambridge School, particularly regarding market failures?
  • Arthur Cecil Pigou expanded on Alfred Marshall's theories by emphasizing the importance of externalities in market failures. While Marshall focused on equilibrium and individual decision-making within markets, Pigou recognized that unregulated markets could lead to inefficient outcomes when external costs or benefits were not accounted for. This understanding led him to advocate for government intervention to correct these failures, shaping modern welfare economics.
• Discuss the significance of Pigou's concept of externalities in relation to contemporary economic policy-making.
  • Pigou's concept of externalities has significant implications for contemporary economic policy-making as it provides a rationale for government intervention in markets. His recognition that individual economic activities can impose costs or benefits on third parties informs policies such as environmental regulations and taxation aimed at reducing pollution. By using Pigovian taxes, policymakers can incentivize businesses and consumers to internalize the external costs associated with their actions, ultimately leading to more socially efficient outcomes.
• Evaluate how Pigou's theories have influenced modern approaches to environmental issues and sustainable development.
  • Pigou's theories have profoundly influenced modern approaches to environmental issues by laying the groundwork for integrating economic analysis into environmental policy. His advocacy for using Pigovian taxes to address negative externalities has become a foundational principle in environmental economics, prompting governments worldwide to implement similar mechanisms. As societies increasingly prioritize sustainable development, Pigou's insights help frame discussions on how to balance economic growth with ecological responsibility, demonstrating that addressing external costs is crucial for achieving long-term sustainability.

Related terms

Externalities: Externalities are costs or benefits incurred by third parties who are not involved in an economic transaction, leading to market failure when these effects are not reflected in market prices.

Welfare Economics: Welfare economics is a branch of economics that focuses on the allocation of resources and goods to improve social welfare and overall well-being.

Pigovian Tax: A Pigovian tax is a tax imposed on activities that generate negative externalities, designed to encourage individuals and firms to reduce their harmful behaviors and align private costs with social costs.