Pigouvian versus Marshallian tax: market failure, public intervention and the problem of externalities

<title>Abstract</title> In <italic>The Economics of Welfare</italic>, Pigou develops the idea of what will be widely known as ‘Pigouvian tax’. Together with the concept of externality, they constituted two of the most important founding elements of modern welfare economics. Many have suggested that, on the way he treated externalities, Pigou might have drawn from his master, Alfred Marshall (see the proposal for a ‘fresh air rate’). The aim of this paper is to inquire into the features of the original proposals made both by Marshall and Pigou, underline the differences between the two and challenge the hypothesis of ‘continuity’.