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What were some of the key economic ideas of Arthur Pigou?

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A-Level, IB
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Last updated 16 Jul 2023

Arthur Pigou, an English economist, made notable contributions to welfare economics and the study of externalities.

here are some of the key economic ideas of Arthur Pigou:

  • Welfare economics: Pigou is considered one of the founders of welfare economics, which is the study of how to achieve economic efficiency and equity. He argued that the government should intervene in the economy to correct for market failures, such as externalities and public goods.
  • Externalities: An externality is a cost or benefit that is not borne by the person who causes it. For example, pollution is an externality because it imposes a cost on society as a whole, but the polluter does not have to pay for the cost of the pollution. Pigou argued that the government should tax externalities to internalize them, meaning that the polluter would have to pay for the cost of the pollution.
  • Public goods: A public good is a good that is non-excludable and non-rivalrous. This means that it is impossible to exclude people from enjoying the good, and that one person's enjoyment of the good does not reduce the amount of the good that is available to others. Pigou argued that the government should provide public goods, because the private sector would not be able to provide them efficiently.
  • The concept of social marginal cost: Pigou introduced the concept of social marginal cost, which is the cost of producing a good or service, taking into account both the private cost and the external cost. He argued that the government should tax goods and services that have a positive social marginal cost, and subsidize goods and services that have a negative social marginal cost.

Pigou's work had a significant impact on the field of economics. He has helped to shape the way that economists think about economic efficiency and equity, and he has provided a framework for the government to intervene in the economy to correct for market failures. His work has also been influential in the field of public policy, and it has been used to justify government intervention in the economy, such as taxes on pollution and subsidies for public goods.

Here are some of his notable works:

  • The Economics of Welfare (1920): This book is a classic work on welfare economics that introduces the concepts of externalities, public goods, and social marginal cost.
  • A Study in Public Finance (1928): This book is a classic work on public finance that discusses the role of the government in the economy.
  • The Economics of Welfare: Second Edition (1929): This book is a revised edition of The Economics of Welfare that includes a discussion of Pigou's views on the Great Depression.

Pigou is a leading figure in the field of welfare economics. His work has helped to shape the way that economists think about economic efficiency and equity, and he has provided a framework for the government to intervene in the economy to correct for market failures. His work has also been influential in the field of public policy, and it has been used to justify government intervention in the economy, such as taxes on pollution and subsidies for public goods.

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