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It seems that there's an implicit assumption in the rejection of the Pigou club. Specifically, that it will result in things that are bad. If this isn't an assumption, then why would anyone reject something that results in things that are neutral or good. At the same time, the author explicitly rejects the Pigou club on the basis that you can't know what's good or bad.

Isn't there an inherent contradiction? If you can't know what's good or bad, how can you make any claims at all about the goodness or badness of the Pigou club? If you can't make any such claims, on what basis do you reject it?

It seems to me that those who are members of the Pigou club seem to think that carbon emissions are bad things. Once you start from that assumption, what's wrong with Pigouvian taxes to disincent bad things?

If, on the other hand, you start from the assumption that Pigouvian taxes are bad things, can't one critique that assumption using the same logic as used to critique membership in the Pigou club?

mjh: No one would propose culling a town's excessive deer population by letting hunters come in at night. The archers would not know what they were shooting at. It would be no defense of the nighttime culling to say, "But your criticism is that we don't know. If we don't know, then how can you say night culling is worse than day culling? How do you know?" Pigou is the blind archer.

Mike Moffatt and I had an exchange about this a few weeks back:

1. http://organizationsandmarkets.com/2008/05/05/a-question-for-the-pigou-club/

2. http://economics.about.com/b/2008/05/29/peter-klein-on-the-pigou-club-and-externalities.htm

3. http://organizationsandmarkets.com/2008/05/30/mike-and-me-on-externalities/

4. http://economics.about.com/b/2008/05/30/tort-based-approaches-to-reducing-air-pollution-where-is-the-evidence.htm

It seems to me that the strongest Pigouvian argument is a comparative one, namely that other approaches to pollution control such as cap-and-trade systems and (my preferred alternative) common-law-based tort remedies are also imperfect and subject to knowledge problems and interest-group pressures. However, the historical record suggests, to me anyway, that the common law has a much better record handling these kinds of problems than Pigouvian taxes and subsidies.

Roger Koppl: Aren't Hayek's and Coase's criticisms of Pigou more generic than just you can't know in certain situations. Aren't they saying there are no circumstances under which you can know. If so, the analogy to culling at night and being blind and night is a bad one. Because it implies that you're not blind in the day. And their claim seems to be that you're blind all the time.

But it seems like Lopez and Boettke are saying that you're only blind judging the badness of carbon emissions. But you're not blind when judging the badness of Pigouvian taxes. Or put another way, the members of the Pigou club are blind, but the critics of it are not.

Me personally, I don't want to remove "goodness or badness" from the equation. I think we have room to say, that's a bad consequence and we want to avoid it. I am skeptical of (Pigouvian) taxes to engineer efficient behavior. But the criticism can't be that we're all blind. If we are all blind, shouldn't I be equally skeptical of any criticism of Pigouvian taxes as I am of Pigouvian taxes?

That being said, I'd give a high probability to the proposition that I just don't understand. Perhaps there's help?

mjh: I just don’t see the inconsistency you refer to. What can we do reduce soot in the city’s air? If you just want less soot, you can prohibit burning within municipal boundaries. Or you could tax soot out of existence. Soot is a bad and we can directly squash it. No problem. But what if you want to strike a reasonable balance between the costs and benefits of soot? Then you’ll need a measure of what is “too much,” “not enough,” “just right.” Pigouvian taxes require you to figure that out with relatively little help from the market process. You need the tax rate that closes the gap between social and private cost *as that value exists in the desired market equilibrium*. But by definition, the current equilibrium is not the desired equilibrium if there is an externality. Thus, even if you somehow knew the current gap between social and private cost, it would *still* not be the theoretically correct Pigouvian tax. Coasian solutions make greater use of the market process and, therefore, of the knowledge created by it. I think that’s what Ed Lopez was getting at.

BTW, I don’t think Ed would deny that we need to check this logic against experience. He was summarizing the logic of case (hence the reference to nutshells) not hammering out any supposed knockdown argument that settles the issue irrevocably until the end of time.

"I think we have room to say, that's a bad consequence and we want to avoid it."

Who is the we that decides whats a bad consequence?

Peter, the most significant kind of bad consequence is something that is the reverse of the intended outcome of a regulation or intervention. In that situation the problem is to get the advocate to accept the facts of the situation and not just to demand more regulation.

One of the attractions of the common law approach suggested by Peter Klein is that it is inherently piecemeal and so the outcomes can be assessed with some confidence, unlike the case with massive and sweeping bundles of statutory regulation, driven by rent seekers and coercive utopians.

Roger Koppl: Thanks for the clarification. Your clarification is deeper than, "No one can know good and bad" hence we know that Pigouvian taxes are bad. You're saying something different than that. You're giving specific reasons why Pigouvian taxes are bad: you can't know the right tax rate. Which is similar to, but not the same, as the criticism that I read. Perhaps the criticism assumes that, but it wasn't clear to me.

I suppose I should clarify that I am not an economist, nor a formal econ student. I'm just an interested learner. Thanks for the education.

I'm glad that was helpful, mjh. I think I was just restating Ed Lopez's point. Ed was giving a "nutshell" version of the argument, which is well worth doing, but always creates the risk of misunderstanding.

Sorry for coming late to the comments. Thanks, Pete, for unpacking some of the meaning behind my drive-by criticism.

First, to be fair to Pigovians, I don't think they flat out ignore knowledge and incentives, but I do think that they believe transaction costs are too high in the case of energy because of the sheer number of polluters, as well as the various roles they're in (each node of energy supply plus all energy users, especially industrial). I think the collective action argument here is a difficult one. Perhaps Mankiw, Cowen and even Eco-Scam author Ronald Bailey have thought this through en route to their conclusions. What I think has received little attention is that the Coaseian solution is even less likely to obtain under political allocation, for the simple but broad reason that transaction costs can be even higher in political markets. Buchanan has a paper, "Why no political Coase theorem," on this.

Second, Pete's market process point strikes closer to the real motivation behind my drive-by post. Too much planning will prevent relative prices from adjusting in the market process that is beneficial to society. The only real long-term carbon solution is to achieve optimal substitution out of oil into alternative energy sources. Too much tax on gas & oil distorts incentives for innovating alternative sources. Political favoritism (e.g. the hybrid car tax credit) inefficiently over-emphasizes one type of alternative over others. The policy challenge here is no different from Hayek's 1945 challenge to economic science. The best long-term policy will be one that allows technological innovation to be informed by use of dispersed knowledge of value and cost, of both goods and bads, of both existing and future (potential) goods. It's not that policymakers are simply blind, or simply venal, or simply gridlocked. It's that we don't know in advance how to select innovations that reduce cost, either production or external.

What I'm wondering is whether Mankiw cares at all about the cost of externalities. The taxes that he recommends are FAR beyond any possible level of externalities.

On his website, Mankiw wishes federal gas taxes were raised by a dollar. That would bring the total to almost $1.50.

Now, there is a problem of knowing the exact cost of the externality, but if you had to take a guess on the damage caused by burning one gallon of gas certainly the vast majority of people would agree that $1.50 is WAY out of the ball park.

The U.S consumes about 140 billion gallons of gas a year. Is Mankiw assuming the externalities cause $210,000,000,000 in damages every year!!!! From common sense, does anyone see 210 billion dollars worth of damage around them environmentally every year.

The Pigou Club is not arguing about whether the pollution caused is 10 cents per gallon or 15 cents. Taxes so high are simply not based on an real damages and are simply a revenue machine for the government.

Verdan:

$1.50 might be high, but I don't think it is very obvious that it is too high. If my back of the envelope calculations are right, then 210 billion dollars is about 670 dollars per person, which doesn't seem so very high after all. That's, like, 1.4% of per capita GDP. If the people could vote to have a 1.4% addition to income taxes that would make car exhaust magically disappear, I bet they'd go for it in huge numbers. The present value of 670 dollars at 5% interest is $13,400. That doesn't seem such a large value for the lifetime cost of having to put up with exhaust of other people's cars.

Roger,

I mean are you really that bothered by car exhaust. I wouldn't pay 5 dollars to make it go away. Doesn't bother me one bit. I'm not trying to be an ultra-capitalist environmental hater or something, but seriously I'm not really bothered at all. If I lived in Mexico City, that might be a different story.

Further, what is the point of counting per capita as the tax will be distributed per driver. To say drivers would be happy with a 1.50 raise for any benefit is pretty hard to swallow. Most importantly while $670 might be change to you working class families affected by a gas tax have a lot more important things to buy than clean air.

Lastly, this isn't a one time cost. It's an every year payment which is a big difference. It's not a one time 210 billion dollar payment but perpetual year after year.

Lastly, where is the 210 billion damages to the environment?

One more thing....who ever said the exhaust was going away???

If the government is getting the 210 billion. That means people are still buying gas, still driving, and still producing exhaust. So at best the average Joe is paying his $670 for a reduction on the margins.....a pretty bad deal. What instead of ten cars around him there will be 9??? Not a great deal for $670. I'd rather spend my cash on lead toys from China than that mess

I think I've got the easy end of the argument, Vedran. All I have to do is show that $1.50 is not insane. My claim pretty clear since that tax rate was proposed, you have informed us, by none other than Greg Mankiw. He is a smart guy and hardly to be given the back of one's hand.

I didn't mean to suggest that the tax would eliminate all exhaust, though I completely see how I gave you that impression. Sorry about that. The mental experiment was meant to show that the external costs of gasoline usage might well be as high as $1.50 dollars per gallon. I don't think I want to pursue this much further, but if you google "car exhaust health effects" you come across a BBC report of 1999 saying that 24,000 premature deaths are attributable to air pollution, to which car and truck exhaust is a major contributor. They have (and then had) about 60 million people. Scaling up to the American level of 300 million and valuing each such death at 2 million dollars (which is probably half or less the proper value) brings you to 240 billion dollars *per year* from premature deaths *alone*. Now, there are problems with my calculation, starting with the fact that not all of those British deaths (24,000 per year) are attributable to the use of gasoline. But, again, all I have to do is show that $1.50 is not *obviously* excessive. QED, IMHO

Showing that someone died prematurely from car exhaust is a pretty damn hard thing to do. That's really not a credible study at all in my opinion.

When's the last time you heard of someone dying from car exhaust??? I have heard of a few people but they happen to have committed suicide using car exhaust.

Show me a credible piece of evidence and I might agree. But that 24,000 number seems to be pulled out of thin air no pun intended

Also, I like how the BBC article goes on to say what exposure to certain chemicals can do negatively to you instead of what can exposure from the level found in exhaust do to you. A fallacy to say the least.


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