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What is a Green Tax?

Green taxes are mechanisms to address pollution by firms (a negative production externality) and individuals (a negative consumption externality). By charging firms and people approximately the same price as the value of the damage done by the externality, the government gets them to internalize the negative externalities they are creating. Green taxes are Pigovian Taxes, named after their inventor, Arthur Pigou. Pigovian taxes are also known as sin taxes, and when applying to the 'sin' of pollution, they can also be called Eco-taxes or environmental taxes.

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