Arthur Cecil Pigou, commonly known as A.C. Pigou, is best known today for his work in welfare economics. He made a large contribution to the theory of economic prosperity. The results of his research were presented in his book "Economics of Welfare," published in 1924. Pigou was not engaged in global issues of "economics”. By A.Pigu economic well-being is "the totality of satisfying and unsatisfying needs, which can be measured with money." The "welfare economics" plays a central role in such a concept as national income, or as he called it a national dividend. According to Pigou national dividend is "everything that people buy for their income, as well as services provided by household". The national dividend is those goods and services which are produced by an individual in society. National dividend may be different in different periods. He describes not only the efficiency of production, but also it is a key indicator of social welfare. The satisfaction of poor will rises quicker than the satisfaction of reach will fall. According to the theory A.Pigu redistribution of wealth from the rich to the poor could increase overall welfare only if it does not reduce national income.
At the same time Pigou pointed out that the size of the national dividend was not an accurate indicator of the general welfare. This is explained by the fact that the concept of a national dividend includes everything that has monetary value, what has cash value.
A.Pigu shared private and public goods. He paid great attention to the issue of differences in individual well-being of one group of people and the general welfare of the state. The concept of general welfare of the state is higher than the other two, as it includes more than the level of income, and other categories, such as the relationship between people and their living conditions, working conditions, etc.
It should be mentioned the relationship between private and public good and income. In order to have the optimal relations between them, it is necessary to equalize private and social product as much as possible.
Back to the question of market competition. If we compare the welfare theory Pigou and Pareto optimum, it can be noted that A. Pigou was sure that the market, or the market competition, is not able to provide optimum welfare. Pigou saw the sollution, on one hand, in price regulation, and on the other hand, in usage of subsidies. In the first case, the lower prices will contribute to the expansion of production, and hence welfare, higher prices will reduce the demand for the product, and as a result, will not contribute to welfare. Similarly, in the case of payment of subsidies, the use of progressive tax system: the government pays subsidies "victims", thus improving their welfare.
Thus, the optimum well-being, according to Pigou, can only be achieved with the direct involvement of the state with its impact on the use of resources and the distribution of income. This is probably considered A.Pigu as income equality maximizes the sum of utility in society.
To cut long story short, there are some main definitions, which were invented and expanded by A. Pigou or even named in his name:
- Pigou effect is a term in economics referring to the relationship between consumption, wealth, employment and output during periods of deflation. Defining wealth as the money supply divided by current price levels, the Pigou effect states that when there is deflation of prices, employment (and thus output) will be increased due to an increase in wealth (and thus consumption). Arthur Pigou argued against Keynesian economic theory by professing that periods of deflation due to a drop in aggregate demand would be more self-correcting. The deflation would cause an increase in wealth, causing expenditures to rise, and thus correcting the drop in demand.
- Pigovian tax is a special tax that is often levied on companies that pollute the environment or create excess social costs, called negative externalities, through business practices. In a true market economy, a Pigovian tax is the most efficient and effective way to correct negative externalities. Pigovian tax is applicable only because market economies often fail to provide a proper incentive to reduce negative externalities.
Pigou approval can be taken or not, you theory can agree or disagree with his theory, but one thing is certain, that his merit is that he marked the beginning of the theory of distribution of national income, directed and reviewed the problem of combining economic interests of the individual, the company and society.