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Hi, Pigou,

I appreciate your idea of externality very much! The concept that external costs or external benefits affect a party that did not choose to incur that cost/benefit is in accordance with my idea. I also believe that the external costs are directly related to private costs which also associates with the idea of self-interest. Since I believe that economy depends on human behavior, the costs that are interrelated within the consumers, producers, and bystanders are also evidence of the presence of dynamic economy. Your idea also supports the fact that as the equilibrium point gets higher, the quantity supplied get higher whereas the quantity demanded decreases. In fact, I agree with your tax system! To prevent detriments resulted from human's greed/selfishness, your tax system of charging the producers - such as those who desire to gain profit but cause negative externalities - is superb!

- Alfred Marshall

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Dear Mr. Pigou,

Your opinion on the way taxes should be assigned is certainly has an interesting approach to it, however, I still maintain my stance on the way it should be distributed, as I am convinced it is the most fair and equal method, given that the state should only have the right to take away an amount directly proportionate to what the person earns.

While I see the stance from which you are coming from with the statement of rewarding those who ‘promote benefits of society’, I do not believe it to be sustainable. I find the weaker points of the economy to be its instability, and if taxes are not taken from everyone equally in correlation to their exact income, it runs risk of becoming severely unbalanced.

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Hi Mr. Pigou,
Your works in welfare economics is greatly appreciated. Being a teacher who established the school of economics at the University of Cambridge is very impressive.

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Hi Mr. Pigou, for your claims about externality, I completely agree with you that there should be a subsidy for the positive externality because it promotes more innovation and will be beneficial not only the economy but everyone. However, I don't really agree with that negative externality should be taxed. Although negative externality would create harm to the society, but charging tax would make entrepreneurs scared, and they might not be willing to take the risk of testing new things out and get charged with extra tax. Charging extra tax will interrupt innovation and will indirectly affect the growth of economy.

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Hi Arthur,

I see that you also advocate the intervention of government on the market system—the idea I stress as being detrimental! Yes, you, unlike some others, put forward a specific reason for regulations. I do agree with you to the extent that these externalities exist. But the market still should be left alone!

By taxing certain goods or activities, you are disrupting a perfectly- working market system. Self-interest and competition do an excellent job for the greater good of society; why do you have to ruin the system by "mere" externalities? Furthermore, unnecessary taxation on goods or activities can have side-effects of rather acting a tax on wages, which is a burden to them. If you still stress that we must do something about these externalities, why can't we approach it outside the market? Public education? Educate the people of consequences from certain goods or benefits of others. I fully support government's role in education, but never in the market.

-Adam Smith

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In many ways similar to your mentor, our dear Mr. Marshall, you seem to overstate the benefit and necessity of the presence of a governmental entity in our markets. Due to this, your viewpoints tend to be skewed by a general belief that taxation and subsidy should/do remain not as variables but rather as constants in an economy. Allow me to say that this is certainly not the case. In fact, taxation is INCREDIBLY detrimental to the development of economic systems. This is one of the reasons for which I stand HEAVILY against the involvement of governments in this field. Markets SHOULD remain FREE. When these external factors (including but not limited to taxes) become complicit in the well-being and nature of an economy, consumption becomes substantially regulated and more often than not, reduced as a result. Such an occurence is a major hindrance on the progression of markets. Pick up yourself a copy of On the Principles of Political Economy and Taxation to see exactly what I mean - one of my best and a terrific read, if I may say so myself.

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Looking back at my life, I am proud of what i've accomplished. Until this day, many economics still believe that my tax system is a more efficient way to deal with problems like pollution comparing to the government's solution. I am surprised that my theory is still not globally applied! My tax system is such an efficient solution to deal with negative externalities without significantly altering the economy. It is such a disappointment that people are still not realizing this! Thanks to the Pigou Club, which is established by my fellow supporting economists, supports my tax system and tries hard to apply taxes on carbon to address the issue with climate change.
I also feel really proud of my students in Cambridge, many of whom became influential members in the world of Economics based on the ideas of my respectful teacher, Alfred Marshall, and my idea of externality. My friend, Keynes, worked on the probability model with my accompany.
For my entire life, I have been fighting that welfare should be placed at the center of economic discipline. Improved economic welfare not only result from an increase in national income, but also an increase in the share of national income going to the poor! We do, are responsible to acknowledge the poor. I really do hope those pieces of my work can at least raise some awareness.

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I have published a lot of papers throughout my life from 1901 all the way to 1952. Well, during my earlier years I dabbled bits and pieces in different fields like income taxes and foreign exchange. But in my opinion, my best work was the book that I published in 1920, The Economics of Welfare. I surly have put loads of effort into it! In my book, I developed Marshall’s concept of externalities, which are the costs benefits conferred on others that are not accounted for by the person who creates these costs or benefits. See, this is why my tax system should be applied. How nonsense it is that my analysis was criticized by Ronald Coase in 1960, who argued that taxes and subsidies are unnecessary if the partners in the transaction—that is, the people affected by the externality and the people who cause it—can bargain and negotiate
I have also written some other books, such as The Theory of Unemployment and Employment and Equilibrium.

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Externality & Pigovian taxes:
I first developed on my teacher, Marshall's concept of externality in the 1920s. It is an idea that surely has to be treated with awareness. In markets, there are multiple "costs" that have to be paid, and two of the major ones are private cost and external cost. Private cost is the cost paid by the consumer or the producer, while external cost is a cost paid by bystanders, people other than the consumer or producers. US economists often call those bystanders "the third party". Externality, is, therefore, the external costs or external benefits that affect a party who did not choose to incur that cost or benefit.
I have simply separated externality into two categories---negative, a bad external cost suffered by the bystanders and positive,  a benefit enjoyed by the third party. For example, a company who produces chemicals will create a negative externality for the pollution it causes in the long run. On the other hand, an example of positive externality would be consuming education. One not only get a private benefit, but there are also benefits to the rest of society.

It is the responsibility for all of economists to urge the government to adopt policies that "internalize" an externality in order to limit the impact to parties who choose to incur them. It isn't impossible to solve this issue. I suggest that taxes should be applied to market activities that generate negative externalities, while positive externalities should be offset by a subsidy. By imposing my tax system, a government can create a new "cost" - ideally a cost equal to external cost and discourages the potentially harmful social activities.

Pigou Effect:
Every country is going to experience some recession and prosperity, and a variety of decisions could be made in order to maintain the best out of a community. Around 1943, I derived with a special economic effect: Major decline in prices stimulates economy and triggers a wealth effect, which generates full employment. To put this in a simpler way, during a recession, unemployment rate rises. At this stage, if we reduces the major market price, consumers would spend the same amount of money buying more goods, therefore having spare cash available for spending. If we try to think from a psychological perspective, owning spare cash makes people feel wealthier, so they would like to spend more. This increase in demand can eventually lead to a high rate of employment as employers need to produce more products.

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It took me a while to make this page, seems like I overslept by like…a lot. So this is how the world look like in 2017, looks nice with all those fancy vehicles on the street, and the tall buildings made of all types of things… I don’t even know what they are called! It’s so nice to see the light again, now, you may ask who am I, let me introduce myself properly. My name is Arthur Pigou, a British economist back in the 19th century. I grew up in  a small town in the sea side, called Ryde, it’s a very beautiful place. I am the eldest son in my family. now, let me tell you how complicated my family is. My father was a retired army officer, a descended from a Huguenot line, which means we have some connections with India and China. Isn’t that amazing! On my mother’s side, she came from an Irish family. When I was young, like my father, I went to study at Harrow but as an approved athlete. So, yes, you can say that I’m quite fit and strong. Later on in my life, I went to Cambridge as a history scholar of King’s College. I was a leading figure in the Union Debating Society, and I began lecture on economics in 1901. In my field, I’m best known for the theory of economic welfare, other than that, I’ve published 12 books and contributed over 100 articles. More amazing things happened later on, for example, I became a professor of political economy at Cambridge University from 1908 to about 1943. Besides from teaching my students, I also have an interest in rock climbing when I was younger. Oh, I can still see myself climbing to the top of that mountain with my dear friend, Wildrid Noyce, a respected English author. As I got older, in the 1930s, an illness starts to affect my health, which restrained me from the sport. After my retirement from being a professor in 1943, I remained in King's College to study economics. To spend all of my free time from retirement, I decided to write down all of the main factors of my life. If you are interested in my theories and perspectives of the society you’re living in now, welcome to my blog (that I spent hours on because the technology is too new for me)!