The point of Pigou Taxation

I know, I know, you don’t believe me. But:

The next challenge in supermarkets is the scale. The sandwiches, soups, and hot dishes laid out in this cafeteria only scratch the surface of the Compass food options. It was the Oxford researcher Michael Clark’s job to go through the hundreds of meals made up of roughly 10 ingredients each, determining the environmental impact. Doing the same for the tens of thousands of products and myriad ingredients in a supermarket would be a Herculean task.

Assume, just for the sake of argument, that you did actually want to do this.

Getting people to switch to environmentally sustainable food options through labels is not new: hundreds of food labels exist, from ones that certify organic, to those that promise sustainable fishing. But a new type is gaining steam, one that summarises multiple environmental indicators from greenhouse gas emissions to water use into a single letter indicating the product’s impact.

What you actually want is some method of simplifying your calculation. Even, not having to do the calculation but getting someone, something, else to do it for you.

Which is what the price system does for you. All inputs into a process are indeed priced. So, the price of the item tells you the costs of all those inputs. You can therefore tell resource usage by the price of the item. This is how we know that recycling often uses more resources, because it is more expensive.

Some of those resources used are, sadly, external to the price system. So, internalise them with a Pigou tax and we’re done. Resource use is now in prices, the only thing we need to look at the judge resource use is the price. We’ve just coopted the entire economy to do our calculation for us.

Ain’t that cute?

32 thoughts on “The point of Pigou Taxation”

  1. Ah, was reading this pile of cack in the Grauniad this morning: ’ The trial gave a sense of what labels were more likely to sway people to buy eco-friendly. They found the most effective way to get people to not buy an item was to use a dark red globe symbol with the word “worse” printed on it. But while effective, it had real world limitations.

    “You’re not going to be able to get anyone to use that unless you threaten them with legislation, because they don’t want to say ‘don’t buy this’,” said Brian Cook, the senior researcher leading the project.’

    Bet he got a stirring in his underpants at the thought of that…

  2. “ All inputs into a process are indeed priced”

    The problem for the campaigners is that those inputs include labour, and they seem to rather like the idea of lots of proles labouring away at low-value jobs.

  3. @Julia
    So does one get extra points on the store card for arriving at the checkout with every purchase in the trolley having the dark red globe on it?

  4. But a new type is gaining steam, one that summarises multiple environmental indicators from greenhouse gas emissions to water use into a single letter indicating the product’s impact.

    I’ll be looking out for ‘F’ labels (for “don’t give a Fuck about environmental impact”)

    Same way as I tend to buy the traffic-light labels that have more red, on the grounds that they’ll probably taste nicer with all that fat and salt in them.

  5. No Tim, it ain’t cute. The problem is the word and concept of ‘tax’. Apart from shysters like El Professore Kartoffel grifting on lefty funding sources, we have governments always in dire need of funds (just like mediaeval kings for their wars) seeing it just as another revenue source to be squeezed periodically.

    Personally, I can see the point of accounting for externalities as long as they are real and can be costed accurately, but having the government reap the benefit is absolutely not to be countenanced!

  6. Whilst on the whole it is the right approach. In this specific case we know it won’t work for consumers (at the marginal differences we are talking about).

    Most packaged sandwiches (of the same ‘quality’) retail at the same price. Clearly the ingredients don’t cost exactly the same so the shops are doing a degree of ‘price fixing’ – no doubt partly because the cost of individual ingredients vary over time and the cost of tracking that and repricing every time is not worthwhile. Worse than that meal deals confuse the pricing mechanism even further. Its typically as cheap to buy the sandwich, snack and drink on the meal deal as it is to buy just two of the items individually, and commonly there may be 50p+ difference in the marked up price of individual items within a category.

    Pure market competition theory would say that competition should optimize the the price of each individual item to the best possible, but clearly convenience and other factors (the fact ingredients make up a small percentage of the price) mean it doesn’t make a different. This also means that marginal changes in individual ingredient prices due to a Pigou tax would (in this case) unlikely to make a difference in the end price of the sandwiches. Of course if some ingredients increased significantly in price then those sandwiches may no longer be avaialble/be substituted or moved into a more expensive ‘premium’ category.

    That said it may still make the supermarkets consider cheaper (more environmentally friendly) alternative products, so would possibly have some of the desired effect at scale. I’d also suspect that most of the damage comes from the making, packaging, distribution and wastage of the sandwiches rather than the ingredients themselves, and that in the grand scheme of things that damage is marginal and not economically valuable to worry about.

    If you value your environmental impact sufficiently then you shouldn’t choose between marginal difference between different flavours of packaged sandwiches, you should choose to make your own sandwiches.

  7. I have a little peripheral contact with the world of retail jewellery. The greatest lesson my jeweller friend learned was that you can’t sell something at the wrong price. Not too much and NOT too little. Now markups start at 100% gross, knock off the vat for net. The way to profit was better buying in. Getting the markups ino the 300% ballpark. The most expensive bits of having a shop are not cost of goods but rent, wages, the bloody council and such. Affected by multiple factors for each shop. But the nature of the site, poshness and such are what dictate the price you can charge.

    What I suppoe I mean is, prices aren’t set by cost-plus but to originate an entirely new and original to me concept, ‘what the market will bear’.

  8. Rhoda

    I do remember it being suggested to me many years ago that my niece would like some earrings for a present.

    So I thought, ‘Gulp. Where the hell do you buy earrings.’ So I wandered into a jeweller and saw he had a little pillar of custom jewellery. It WAS cheaper than the rest.

    So ok. Penny got her earrings. Evidently I was wrong though. My female lords and masters said the things were quite unsuitable for someone Penny’s age.

    But the jeweller certainly judged well what someone like me would be prepared to pay for a couple of trinkets. How much they actually cost to make I’ve not the faintest idea.

  9. “Personally, I can see the point of accounting for externalities as long as they are real and can be costed accurately, but having the government reap the benefit is absolutely not to be countenanced!”

    The literature on the subject (https://en.wikipedia.org/wiki/Pigovian_tax) suggests Pigou taxes should be revenue neutral. Our host is curiously silent on the issue.

  10. Alas, sustainability is not sustainable. People really should have applied The Precautionary Principle before adopting sustainability.

    Though, of course, adopting The Precautionary Principle violates The Precautionary Principle.

  11. Personally I believe the entire subject of Pigou taxation deserves a supplementary chapter in a new edition of that learned tome “The Joy of Tax” by an illustrious professor of our acquaintance.

  12. . . . one that summarises multiple environmental indicators from greenhouse gas emissions to water use into a single letter indicating the product’s impact.

    It’s obviously silly and arbitrary to condense multiple factors into a letter on a label, so how in the hell are you going to do so for a pigou tax? Or are you going to have multiple pigou taxes, one for each “impact”?

    And if the purpose of a pigou tax is to replace inefficient state interventions with market price incentives, we already know it doesn’t work. No country that has introduced a carbon tax has stopped interfering via subsidies, (other) taxes, grants, regulations, incentives, persuasions, threats, and so on. If a pigou tax doesn’t stop these, or actually funds them, then it’s just another parasitic burden.

    Far from rendering sandwich measuring unnecessary, a pigou tax will simply be used to pay for more twats measuring sandwiches.

  13. I’m not silent on the issue. I just don’t put it as a qualifier into every damn discussion of it. I even praised G Brown when he knocked the landfill tax off employer NI. For that very reason, he’d made it revenue neutral. And that was at least 15 years ago.

  14. The literature on the subject [ . . . ] suggests Pigou taxes should be revenue neutral. Our host is curiously silent on the issue.

    Tim did mention per capita rebates the other day but the implication was that it might be too expensive to administer.

    Per capita rebates would be the way to go. Tax the problem and the money goes straight back to the populace to spend as they please in the marketplace with its new price incentive.

  15. And that was at least 15 years ago.

    It didn’t last fifteen years, though. The landfill tax went up and soon enough so did employer NI. I suppose technically Goon Brown didn’t lie since it was revenue neutral for five minutes.

  16. Bloke in North Korea (Germany province)

    I can confirm first hand, having (pre-rona) suffered hundreds of lunches at a Compass flagship (where they field test new things before inflicting them on factory and office canteens and service stations throughout the known galaxy), that their meals do indeed consist of a selection of 10 ingredients. Chosen completely at random. With (the usually very large quantity of) unsold portions served again the next day, cold, on the “salad bar”, rendered further inedible by an overnight soak in some ghastly starch-thickened sugar-salt-food colouring industrial waste unlawfully described as a “sauce”.

    On topic, I’m coming to the conclusion that most environmental impact claims, short of snatching baby orangutans from the mother’s breast to chop their palm tree down, or fishing the last 3 female cod out of the sea, is basically bullshit.

    All anyone needs to know nutrtionwise on food labels is %: water, carb, protein, fat, sodium.* Everything else is detail.

    *: And, of course, how many baby orangutans were left to starve to death to make the plastic-free cup for your soy pumpkin lattecino.

  17. The curious thing is, I can think of a way a revenue neutral Pigou tax could work. The tax must be known by the entity paying the tax. So you just carry that sum down the supply chain until you get to the final consumer & he receives it as a rebate on his purchase. It just runs alongside VAT but as a negative figure. Could even be incorporated in VAT.
    And that does exactly what a Pigou tax says it should do. Prices in the externality & returns that sum of money to the consumer. Totally revenue neutral.
    Do you reckon any government would buy it?

  18. No. You want the final consumer to pay the tax. Because that’s what changes their behaviour. But there’s no reason that these extrenalities mean there should be more government, or more tax revenue. So, cut some *other* tax by hte same amount the Pigou one raises.

  19. When it’s something I need I am not bothered by a marginal increase in cost. I’m gonna still buy petrol and cut down elsewhere. Wankfest is what it is, the tendency of economists to think what they do is anything other than explaining why what happened didn’t match their ‘forecasts’.

    However, let me be fair. I’m willing to be convinced. Show me a long-term working example.

  20. “You want the final consumer to pay the tax. Because that’s what changes their behaviour.”

    And that’s where the disagreement is. There are two reasons for a tax:
    1. A cost that is an externality, i.e. not previously priced in. An example would be the cost of defending the shipping lanes against pirates. We can’t put a price on each package that accounts for the amount, so it’s lumped into a general tax and that pays for navy, coast guard etc.
    2. Changing behaviour by making some things more expensive. Where do people get off doing this? If something is undesirable (which is another way of saying “causes externalities”) then go through the pain and justification of making it illegal. Otherwise, go away.

  21. @BiS: “So does one get extra points on the store card for arriving at the checkout with every purchase in the trolley having the dark red globe on it?”

    I’ll let you know, because that’s exactly how I plan to shop if this is brought in!

  22. Bloke in North Korea (Germany Province)

    Since when did government need to justify making anything illegal? Where have you been for the last year?

  23. If a Pigou tax changes behaviour, which is a proposition that needs testing, then hiding it in general taxation won’t have the desired effect. You would have to do it like sales tax in the US. Everything is priced sans tax and you get to find out what the tax is when you pay for it. So everyone is always conscious of the tax element. So, for example, petrol is, say, 90p/litre retail+VAT + 40p/litre Pigou tax. Can you see the govt going for that? I don’t so as I said, a Pigou tax is just another revenue source for govt hidden in an overall price.

  24. So, for example, petrol is, say, 90p/litre retail+VAT + 40p/litre Pigou tax.

    I think a carbon tax needs to be imposed further up the chain than petrol. Basically as it comes out of the ground / into the country. Then everything that comes from the oil / coal / gas / etc. costs more than everything that comes from alternatives. Plastic cups cost more than fairy cups; petrol costs more than unicorn piss.

  25. Bloke in North Korea (Germany province)

    “Basically as it comes out of the ground / into the country. ”

    And then you will end up with lobbying for the government to subsidise carbon “exports” in the form of rebates matching the tax per kilo of carbon on imports.

    Guess what happens next.

  26. @ Everybody – why do you think Pigou taxes have no impact on behaviour? Have none of you ever picked up something from a Tesco or Sainsbury or Waitrose “reduced for clearance” counter? They won’t persuade me to buy cauliflower or cattle food but price *does* influence switching between reasonable alternatives.

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