Pigouvian subsidy
Also called: Pigovian subsidy · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A Pigouvian subsidy is a government payment to an activity that creates a positive externality. A positive externality is a benefit that spills over to other people, for which the doer is not paid. Because the doer ignores this spillover, the market produces too little of the activity. The subsidy is set equal to the external benefit, so that output rises to the level best for society. The idea comes from A.C. Pigou (The Economics of Welfare, 1920). It is the mirror image of a Pigouvian tax on harmful activities.
Example
Vaccination protects the person vaccinated and also others, through herd immunity. So India provides free vaccines. EV purchase support (FAME / PM E-DRIVE) and rooftop solar subsidies (PM Surya Ghar) work the same way. They reward activities that cut pollution for everyone.
Don't confuse with
- Pigouvian tax: a tax equal to the marginal external cost of a harmful activity, such as tobacco taxes. It reduces output of a bad. A Pigouvian subsidy raises output of a good.