Good blog. The theory of negative externalities is really silly if not supplemented by an ethical theory which makes clear which externalities may or may not be taxed. It is the same reasoning with public goods too. Pretty girls in public streets are positive externalities, yet I doubt many would advocate to subsidies them going out to ensure the optimum supply. Or tax the obese and ugly to keep them inside.
I think the explanation for why governments don't apply the appropriate Pigovian subsidies and penalties comes down to political practicality. A negative income tax or a subsidy helping older Americans or ppl affected by covid to keep living in their apartments would require substantial taxation that would be very salient to most voters. OTOH pass a minimum wage law or a rent control ordinance and the costs are hidden and non-salient.
Indeed, I think this is a huge part of the reason the left is so opposed to free market mechanisms. Not because they have a theoretical objection to the incentives based approach but because they know it's politically implausible and thus advocating for it isn't an honest signal of concern (people can say they support it with little fear it will ever happen).
Good stuff. The first thing that popped into my head was that catalytic converters could have been handled in this or some similar way. Tax a polluting car, or install a catalytic converter in lieu of paying the tax. You could have done seatbelts the same way.
One argument against Pigovian solutions is that they’re often simply not practical. How do you assess a tax on the external cost of dumping waste into a river? Or determine the external value of planting a garden in front of your house? In practice, it’s likely the case that for many externality-imposing activities, either almost no one would partake at the adjusted cost, as it would be way too high to be worth it, or everyone would, because the tax would be trivial. The cost of going through he rigmarole of assessing the value/cost of the externality and collecting the tax may not be worth the slight efficiency gain over just imposing a straightforward ban.
When i try to explain this principle of subsidizing or taxing externalites, but then leaving businesses alone, a common response is “so we should just allow businesses to do bad things!? This tax/subsidy punishes normal people, why not just ban the bad thing??”
People usually think in very black and white terms: trade offs or odds is not something normal people want to think about.
There's been an argument recently that the government isn't capable of such fine-grained policy, and that only blunt policies like prohibition are viable. I wish I could fine the Twitter thread now, but it was remarking on the recent experience with marijuana decriminalization. Legal, regulated & taxed marijuana businesses are still being vastly outsold by completely illegal ones, and there's basically no enforcement to get the criminals to start obeying the law.
One could at least make an argument that a tax could be applied in a way that penalizes only those who benefit from a negative externality. But I don’t think there is much possibility of basing a subsidy on taxes that fall only on gainers. And the first tax fails to compensate those who bear the cost of the negative externality.
It all depends on bureaucrats being motivated and able to measure things that are hard to measure and potentially embarrassing. How good does the estimate need to be before it justifies coercion?
A huge problem is that attempts to mitigate externalities over the course of a couple centuries has created too many dials, each one adjusting something slightly different, and sometimes each other, creating an economic policy situation so complex that nobody can actually get a handle on what's going on or what to do. And we're stuck that way because for every dial, there are people with a vested personal interest in the existence of the dial and what it's set to.
In "Capitalism," George Reisman has a thoughtful discussion of externalities, both positive and negative, arguing that there is no basis for a government remedy of alleged negative externalities. See "Capitalism, A Treatise on Economics," page 1034, 'Environmentalism and the Externalities Doctrine.' I believe this brief (four page) passage might be beneficial to your class discussion.
In _Markets Dont Fail_, Brian Simpson denies externalities in principle, saying that economics considers only effects on private property. And that externalities is a rationalization of altruism.
Good blog. The theory of negative externalities is really silly if not supplemented by an ethical theory which makes clear which externalities may or may not be taxed. It is the same reasoning with public goods too. Pretty girls in public streets are positive externalities, yet I doubt many would advocate to subsidies them going out to ensure the optimum supply. Or tax the obese and ugly to keep them inside.
I think the explanation for why governments don't apply the appropriate Pigovian subsidies and penalties comes down to political practicality. A negative income tax or a subsidy helping older Americans or ppl affected by covid to keep living in their apartments would require substantial taxation that would be very salient to most voters. OTOH pass a minimum wage law or a rent control ordinance and the costs are hidden and non-salient.
Indeed, I think this is a huge part of the reason the left is so opposed to free market mechanisms. Not because they have a theoretical objection to the incentives based approach but because they know it's politically implausible and thus advocating for it isn't an honest signal of concern (people can say they support it with little fear it will ever happen).
Good stuff. The first thing that popped into my head was that catalytic converters could have been handled in this or some similar way. Tax a polluting car, or install a catalytic converter in lieu of paying the tax. You could have done seatbelts the same way.
One argument against Pigovian solutions is that they’re often simply not practical. How do you assess a tax on the external cost of dumping waste into a river? Or determine the external value of planting a garden in front of your house? In practice, it’s likely the case that for many externality-imposing activities, either almost no one would partake at the adjusted cost, as it would be way too high to be worth it, or everyone would, because the tax would be trivial. The cost of going through he rigmarole of assessing the value/cost of the externality and collecting the tax may not be worth the slight efficiency gain over just imposing a straightforward ban.
Great post
When i try to explain this principle of subsidizing or taxing externalites, but then leaving businesses alone, a common response is “so we should just allow businesses to do bad things!? This tax/subsidy punishes normal people, why not just ban the bad thing??”
People usually think in very black and white terms: trade offs or odds is not something normal people want to think about.
There's been an argument recently that the government isn't capable of such fine-grained policy, and that only blunt policies like prohibition are viable. I wish I could fine the Twitter thread now, but it was remarking on the recent experience with marijuana decriminalization. Legal, regulated & taxed marijuana businesses are still being vastly outsold by completely illegal ones, and there's basically no enforcement to get the criminals to start obeying the law.
One could at least make an argument that a tax could be applied in a way that penalizes only those who benefit from a negative externality. But I don’t think there is much possibility of basing a subsidy on taxes that fall only on gainers. And the first tax fails to compensate those who bear the cost of the negative externality.
It all depends on bureaucrats being motivated and able to measure things that are hard to measure and potentially embarrassing. How good does the estimate need to be before it justifies coercion?
A huge problem is that attempts to mitigate externalities over the course of a couple centuries has created too many dials, each one adjusting something slightly different, and sometimes each other, creating an economic policy situation so complex that nobody can actually get a handle on what's going on or what to do. And we're stuck that way because for every dial, there are people with a vested personal interest in the existence of the dial and what it's set to.
In "Capitalism," George Reisman has a thoughtful discussion of externalities, both positive and negative, arguing that there is no basis for a government remedy of alleged negative externalities. See "Capitalism, A Treatise on Economics," page 1034, 'Environmentalism and the Externalities Doctrine.' I believe this brief (four page) passage might be beneficial to your class discussion.
In _Markets Dont Fail_, Brian Simpson denies externalities in principle, saying that economics considers only effects on private property. And that externalities is a rationalization of altruism.