Title: Pigouvian vs Marshallian tax? The problem of externalities
Author: Caldari Katia, Masini Fabio

In Economics of Welfare (1920), Pigou develops the idea of what will be widely known as ‘Pigouvian tax’: a tax (or a bounty) to be imposed each time the marginal social net product of an investment is less (greater) than its marginal private net product (p. 224). The tax is to be designed and imposed so that the quantity of output is modified and the marginal social and private net product equalize at the “ideal output”. Pigou’s proposal was agreed upon and supported by generations of economists who saw in that tax the possibility to overcome some important and harmful imperfections of the market. The ‘Pigouvian tax’, together with the concept of externality, constituted two of the most important founding elements of modern welfare economics. Collard (2006: 594) suggests that, on the way he treated externalities, Pigou might have drawn from his master, Alfred Marshall. For example, in Principles (1890), Marshall argued in favour of a “fresh air rate”, a tax to be charged to urban landowners and ‘‘levied on that special value of urban land which is caused by the concentration of population’’ (1961, vol. 1, p. 718n.). That ‘‘general rate’’ should have ‘‘to be spent on breaking out small green spots in the midst of dense industrial districts, and on the preservation of large green areas between different towns and between different suburbs which are tending to coalesce’’ (Whitaker 1996, vol. 3, p. 236). The aim of this paper is twofold: first, to inquire into the features of the original proposals made both by Marshall and Pigou; secondly, to underline the differences between the two and challenge the hypothesis of “continuity” set by Collard.

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