Pigou Club

The Pigou Club is an informal grouping of economists, policy-analysts and commentators who advocate for the use of Pigovian taxes—taxes designed to correct for negative externalities in the economy. The name honours the British economist Arthur Cecil Pigou, whose work on welfare economics and externalities laid the conceptual foundation for this approach.

Background

Arthur C. Pigou, writing in the early 20th century, developed the idea that when a private transaction imposes a cost on third parties (a negative externality), society can improve welfare by imposing a tax equal to that external cost. This is the so-called Pigovian tax.The Pigou Club emerged as a loosely-defined “membership” of those publicly supporting such taxes—especially on fossil fuels, gasoline, carbon emissions and other activities with harmful side-effects. One of its most visible proponents was the economist Gregory Mankiw, who coined the club’s name and published a “manifesto” inviting like-minded analysts to join.

Key Principles

Members of the Pigou Club typically endorse the following tenets:

• When an activity (like burning gasoline or emitting CO₂) imposes societal costs not borne by the actor, a tax can help internalise those costs.
• Such taxes should be broad, transparent and efficient, ideally substituting for more distortionary taxes (such as on income) or heavy regulation.
• The revenues raised can be used for other tax reductions, redistribution or investment in public goods, thereby offsetting unintended burdens.
• The policy-focus is less about revenue for its own sake and more about aligning private incentives with social costs.

Objectives & Scope

The objectives of the Pigou Club include:

• Promoting public discussion of Pigovian tax policy frameworks, such as a carbon tax or higher tax on gasoline.
• Encouraging policymakers to adopt efficient market-based instruments over sector-specific regulations whenever possible.
• Advocating that tax designs incorporate environmental, congestion and health externalities in economic policy.
• Highlighting that fixing the “externality problem” often leads to co-benefits such as reduced pollution, improved public health, and even fiscal sustainability.

Membership and Operation

• The Pigou Club is not a formal organisation with dues or membership rolls; instead, it is a rhetorical device used by Mankiw and others to recognise those who have publicly endorsed Pigovian‐tax ideas.
• Recognised “members” include economists, editorial writers and public-policy figures who have advocated higher taxes on carbon, gasoline or other taxed externalities.
• Since it is informal, the club functions more as a label for shared policy orientation rather than a structured advocacy group.

Advantages & Implications

Advantages:

• Pigovian taxes are theoretically appealing because they directly address external costs and may improve economic efficiency.
• They offer a more flexible, revenue-generating alternative to rigid regulatory regimes—which can suffer from compliance costs and unintended consequences.
• When implemented, they can shift the tax burden toward more harmful activities, encouraging innovation and behavioural change (for instance, cleaner energy, less congestion, lower emissions).

Implications:

• Implementing a Pigovian tax may be politically challenging because the taxed goods (e.g., fuel) are often visible and popular.
• Proper design must account for regressivity (where lower-income households may bear a larger burden) unless mitigated by revenue rebates or offsets.
• The size of the tax must be carefully calibrated: setting it too low fails to correct the externality; too high may lead to significant distortion or public backlash.
• Revenue use matters: recycling revenue back into tax cuts or public investment improves political and economic outcomes.

Criticisms & Limitations

• Some critics argue that precisely measuring the “external cost” to set the tax level is extremely difficult, and mis-estimation can lead to over- or under-correction.
• Others contend that in some cases regulation or direct controls might be more effective or politically feasible than taxes.
• The political economy of raising taxes on visible goods (fuel, electricity, etc.) can lead to unpopular outcomes, protests or policy rollback.
• A pure focus on Pigovian taxes may ignore complementary policy tools (such as innovation subsidies, infrastructure investment or behavioural nudges).

Significance in Policy Debate

The Pigou Club has significance beyond the label because it embodies a broader shift in economic policy discussion: from regulation-heavy models toward market-based corrective instruments. In debates on climate change, energy policy and environmental taxation, the Pigou Club’s framing highlights how economists see taxes not only as revenue tools but as instrumental mechanisms to align private incentives with social welfare. For students and practitioners of public finance, the club concept serves as a useful shorthand for the coalition supporting efficient externality-correcting taxes.