Which of the following best describes the concept of a Pigouvian tax?

A Pigouvian tax is designed specifically to address the issue of negative externalities, which occur when the actions of individuals or businesses result in costs that affect third parties not directly involved in the transaction. For example, pollution from a factory imposes health and environmental costs on society that are not reflected in the market price of the good produced.

By imposing a tax equal to the external cost caused by the negative externality, the Pigouvian tax aims to realign the private cost (borne by the producer) with the social cost (borne by society as a whole). This encourages producers to reduce their negative impact on the environment, leading to a more efficient allocation of resources. In essence, the tax provides an economic incentive for businesses to decrease harmful behaviors, ultimately benefiting society.

This focus on correcting market failures and promoting social efficiency highlights why this option is the best description of a Pigouvian tax. The other options do not accurately capture this fundamental aspect of addressing negative externalities.