A. Cecil Pigou

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Following in the footsteps of his teacher and mentor, Alfred Marshall, Arthur Cecil Pigou gained notoriety by highlighting social welfare as an essential component of economics. By publishing his book The Economics of Welfare, Cecil Pigou emphasized the importance of government in preventing market failure.Cecil Pigou believed that by manipulating taxes and subsidies appropriately, the government can prevent the major causes of market failure, such as lack of competition, too much income disparity, and lack of public goods. But Pigou’s focal point was the need to correct negative externalities via taxes. Negative externalities are the byproduct of a purchase that hurts society at large (smoking creates second-hand smoke). According to Pigou, the government should impose a special tax–tobacco tax–as a deterrent for too much smoking. Cecil Pigou was interested in positive externalities as well, which is a favorable impact on a third party, like recycling or upgrading your skills. Pigou argued that government subsidies would encourage people to increase their consumption of the products and services that create positive externalities (receiving a tax exemption when installing energy efficient hot water boiler), and that taxes would restrict their consumption of products and services that exhibit negative externalities. (Thus Pigouvian taxes and subsidies were named in his honor.)As a professor of political economy at the University of Cambridge, Cecil started out as a neo-classical but he slowly morphed into the modern school of economics, riding the 20th century waive on the new Keynesian current.Do you think that Cecil Pigou enjoyed praise for his theories and conclusions? Think again. Not only did Cecil Pigou suffer from attacks by his own colleagues, like John Maynard Keynes (which truly hurt his feelings), but his theories were squeezed in the 1960s when Ronald Coase, together with the advent of the Public Choice Theory demonstrated how the government can be less efficient than the private sector.Does this mean that Pigou was cloaked in socialism? Far from it. A. Cecil Pigou was for free trade and free enterprise. He just believed that the government should play a more active role in the economy, rather than stand on the sidelines as a referee.

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