I know, it might sound weird coming from someone who really doesn’t like taxes, especially taxes that are passed-off as “well-intentioned”. The British government is calling for a raise in taxes on motorists to cut carbon emissions and I personally support the move.

Taxes on gasoline are an economically justified and effective way of correcting a harmful externality (CO2 emissions) by accounting for the social cost of gasoline consumption. A gasoline tax, for this purpose – and not for the purpose of raising revenues – is an example of a Pigouvian tax.

A Pigouvian tax – named after Arthur Pigou and championed most recently and enthusiastically by Greg Mankiw – is a tax that corrects externalities by making it more costly to participate in the said action. Pigouvian taxes are meant to be revenue neutral by being enacted side-by-side with an equivalent tax cut in another area.

Whether this proposal by the British government is a Pigouvian tax or just an outright tax increase remains to be seen. As long as it is Pigouvian, I throw my hesitant support behind it.

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