Arthur Cecil Pigou

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Arthur Cecil Pigou was born in 1877 at Ryde on the Isle of Wight, Great Britain, died in 1959 in Cambridge, Great Britain. He studied history and economics in Cambridge. He was a student of Alfred Marshall and in 1908 he succeeded him as a professor of political economics at University of Cambridge. He stayed at this position until 1943. In 1913 he published his first major paper Industrial fluctuations. In 1920 Pigou wrote The Economics of Welfare where he describes the issue of distinguishing between social and private marginal products and costs. Later that book had become one of the bases of an analysis on government intervention with a relation to externality. In The Theory of Unemployment (1933) he expressed his neoclassical opinions that later were strongly criticized by John Maynard Keynes.

In total he published over twenty books and essays about economics, defense economics and environmental protection.

Pigou Effect

The Pigou Effect is an outcome of discussions between him and Keynes. According to Pigou reducing price level indicates increase of cash value which leads to rise in real balances of wealth. It means that a consumer can purchase more for the same amount of money i.e. consumption rises. Increased demand on real good sustains activity of the economy, which is a compensation of depressive effects of the price decline described by Keynes.

Later Pigou Effect was generalized by Don Patinkin and called Real Balance effect.

Economics of Welfare

In The Economics of Welfare Pigou recognizes two concepts:

  • social net marginal product
  • private marginal product

Differences between them occur because government intervention can result in rise or fall of personal income. Therefore, individual actions don't always necessarily lead to maximization of national income. It is a reference to British economics tradition (e.g. Alfred Marshall) where are analyzed examples of beneficial effects of government intervention on market economy.

In his definition of total (aggregate) welfare as a sum of utility of the whole society Pigou presents a utilitarian view that change of utility for a person can be compared to the change in his basket of goods.

A. C. Pigou focuses in particular on externality. External cost or benefit are the actions that cause either profit or loss to the others. Making a private park in the neighborhood is an example of external benefit, while building a contaminating factory creates external cost. To equalize external cost, Pigou created a taxation system (later called a Pigovian tax or Pigouvian tax) that compensates indirect negative effects. Thanks to that it was possible to bring market economy closer to social optimum. That theory was questioned by Ronald Coase in Coase Theorem.

In the field of payment A. C. Pigou had traditional neoclassical views. However, in the area of externality and its relation to environment his theories were closer to interventionism.


  • Bremond J., Salort M., Leksykon wybitnych ekonomistów, Wydawnictwo Naukowe PWN, Warszawa 1997
  • Słownik historii myśli ekonomicznej, pod red. E. Kundery, wyd. Oficyna ekonomiczna, Kraków 2004
  • Arthur Cecil Pigou @ wikipedia

Author: Weronika Buczak