Timmy elsewhere

At the ASI.

In which I wake up to one of the problems with Pigou Taxes.

4 thoughts on “Timmy elsewhere”

  1. Isn’t the problem with Pigou taxes not that the money is no longer available to the general public to do the damaging externality thing but is now available to politicians to to the damaging externality thing?

    E.g. I pay a Pigou tax on my plane tickets for all the terrible climate devastation I am thereby wreaking, but the money is not used to combat global thermonuclear climactic armageddon – it is instead used to buy a plane ticket (first class of course) for a politician?

  2. But “the politicians are involved” is present in anything.

    What’s the alternative to Pigou taxes on say, fuel? It would be rationing to reduce it. We’d all get a certain number of gallons a week. Except, you’d then have an exception for “key workers” to make sure they could get to the hospital for the 2am shift, an exception for people living in the Highlands, an army of inspectors watching out for people trading their ration with their bicycling neighbour. It would cost far more to run and be a lot less successful.

    If politicians raise fuel prices, it is at least very visible to the public, and easy for opponents to show, in the way that government spending or debt isn’t. I know people who are fully aware that the reason their holiday to the US is costing a lot more than last time is because the government has hiked up passenger taxes.

  3. JamesV: Doubt you’ll see this, but the answer is no.

    The logic of Pigou taxes is this: If there are no externalities, then we will see the optimum amount of some behaviour – neither too high nor too low. If there is a negative externality then the purchaser is not paying the full price and we will therefore see “too much” of this behaviour.

    If we apply a tax equal to the value of the negative externality, then balance will be restored to the force, and we will again see an optimal amount of this behaviour.

    Pigou taxes have nothing to do with fixing the damage though. In the case of flights, the Pigou tax is ’cause we’re seeing 200,000 flights a year (all numbers made up, obviously), and it ought to be 150,000, so we slap a tax on until the number of flights a year drops to 150,000. The revenue raised from that is, theoretically, very similar to the cost of the the damage of 50,000 flights, but since those flights now aren’t happening, there’s nothing to fix. And the amounts raised aren’t remotely enough to fix the cost of 150,000 flights, nor is it obvious that this damage needs to be fixed. (Certainly in could be, but it’s just one of a infinite number of demands on the public purse, and by no means the most important.) Nor is the tax meant to somehow “balance” the harm of those 150,000 flights; those flights are actually balanced by the benefits those 150,000 travellers gain from flying. The tax is just there to make sure the 50,000 people who aren’t gaining enough benefit to warrant a flight don’t fly.

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