tag:blogger.com,1999:blog-6048425.post8362904021747681750..comments2023-11-02T15:32:15.417+00:00Comments on Bluematter.: On externalities and Pigouvian taxationUnknownnoreply@blogger.comBlogger4125tag:blogger.com,1999:blog-6048425.post-57774637947370700442008-11-21T14:55:00.000+00:002008-11-21T14:55:00.000+00:00I think there are a bunch of problems with your an...I think there are a bunch of problems with your analysis:<BR/><BR/>1) You describe an externality as: "I do something I like which you don't, but because I don't care about your feelings I end up doing it too much." In general, this conveys the right idea, but it is not strictly correct (in particular, the "I end up doing it too much" part). A negative externality can be modeled by a marginal social cost function above the marginal private cost function. If a Pigouvian tax "equates the social and private costs" (that is, the amount of the tax is "correct") and "does not lead to any reductions" in the externality-producing activity, then -- according to standard neoclassical economic theory -- there was not "too much" of that activity (there was no allocative inefficiency) to begin with. Look at it this way: If the Pigouvian tax (which shifts up the marginal private tax curve) does not cause any reduction in the activity, demand must be perfectly inelastic. (Assume this is true even in the long run.) Using standard welfare economics, there will be no "deadweight loss" (DWL) triangle. That is, the externality-producing activity simply results in a welfare transfer to those engaging in the activity from those on whom the negative externality is inflicted. It certainly possible, in real life, that a "Pigouvian tax" is implemented and does not bring about a reduction (or much reduction) in a negative-externality-producing activity, but that may be because the tax was not big enough. Why would you assume, in a real-world case, that the tax was the "correct" amount?<BR/><BR/>2) You state, "The only 'problem' stemming from an 'uncorrected' externality is inefficiency." No idea what the single quotes mean, but that's only true if you don't care about distribution or individual rights. From a distributional standpoint: As noted above, the "uncorrected" externality in the case you describe does not involve allocative inefficiency. It does involve a welfare transfer from some people to others. If you care about distribution, you may consider this transfer a problem. One way to deal with this is to use the revenue from a Pigouvian tax to compensate those harmed by the externality. When there is a DWL due to a negative externality, the allocative inefficiency can be corrected without compensating those harmed. In the case you describe, there is no DWL (allocative inefficiency) to be corrected in the first place, and it's not clear what purpose the tax would serve except to reverse the welfare transfer. There may be other ways to deal with the distributional issue, as by a redistribution of "initial" property rights, as you describe in your Coasian bargaining example, but a tax on the polluters is certainly one way to do it. In cases where, for example, there are diffuse harms to many people and -- even if those harmed were aware of the harms, their sources, and had clear legal standing to extract compensation -- it would be costly for them to engage in bargaining, a tax on a polluting activity may be used not only to correct allocative inefficiency, but to extract compensation. (You conflate the ideas of Pigouvian taxes and the Coase theorem, which is not helpful. The latter was intended as a critique of Pigou. If there were efficient bargaining, Coase argued, there would be no need for corrective taxes. One of the reasons for such taxes is that bargaining is not efficient.)<BR/><BR/>4) On individual rights, a big portion of the ethical case neoclassical economists make for the desirability of "free markets" is that voluntary market transactions (if they take place between rational self-interested agents) are mutually beneficial. People have the right to participate or not participate, and this means (given these assumptions) that they will only participate if doing so would leave them -- at the very least -- no worse off than they would have been had they not participated. If there is a negative externality, some people can be forced to accept some costs without their consent and without compensation. That is, the activity is not Pareto-improving. The Coase theorem tries to get around this by saying: well, if the people inflicting the harm have the property right, then this does not count as a harm to those on whom the harm is inflicted. So you can give a polluter right to the air, and you tell those who get sick from breathing it that they had no right to clean air to begin with!<BR/><BR/>5) Your statement of the Coase theorem is not really correct, as it requires efficient (costless) bargaining. Coase states in his Nobel lecture, "What I showed ... was that in a regime of zero transaction costs ... negotiations between the parties would lead to those arrangements being made which would maximize wealth ..." (quoted in Bowles, Microeconomics: Behavior, Institutions, and Evolution (2004), p.222). Zero transaction costs! In addition, the Coase theorem requires that people are not credit constrained. Suppose that we have a group of high-wealth individuals who engage in negative-externality-producing activities, and low-wealth individuals on whom the harms are inflicted. If the relevant property rights are assigned to the rich, here's no guarantee that the poor will be able to pay the them to stop the activity (even if the latter's welfare loss exceeds the former's welfare gains) in the absence of unlimited access to credit.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6048425.post-58279161709545767112008-09-16T01:17:00.000+00:002008-09-16T01:17:00.000+00:00Luis Enrique - Don't be so harsh on yourself! Ther...Luis Enrique - Don't be so harsh on yourself! There's nothing wrong with your reasoning, and the same goes for nmart.<BR/><BR/>The issue here is that, regardless of whether or not poor African nations or future generations are adequately compensated for suffering environmental change, imposing a pigouvian tax leads to the efficient outcome. <BR/><BR/>Whether we then choose to pass these resources on to poor African and future generations or we prefer to keep them ourselves is a second-order decision. <BR/><BR/>If what we care about is welfare rather than global warming per se, there's no reason to try to maximise it by focusing on the amount of global warming alone.datacharmerhttps://www.blogger.com/profile/07879072575647501066noreply@blogger.comtag:blogger.com,1999:blog-6048425.post-38464909126254287802008-09-12T06:21:00.000+00:002008-09-12T06:21:00.000+00:00I think this is the same point as mrart makes. Alt...I think this is the same point as mrart makes. Although I am probably muddled; my useless intuition tends to drag me in the wrong direction in this case. <BR/><BR/>So, say we calculate and implement a Pigouvian tax from now, carbon emissions don't change too much, and later generations experience what they consider to be some pretty catestrophic consequences. And everyone is supposed to think "that's all right then, because the taxes raised since 2008 fully compensated us for these terrible things happening." <BR/><BR/>I suppose if I find that hard to swallow, I have a problem with the initial distribution of property rights, rather than with Pigouvian taxation per se. <BR/><BR/>In which case, if you agree that this (possible, probable?) outcome I have sketched seems unacceptable, because the initial allocation of property rights is so far from that which would produce a more desirable outcome, then isn't it pretty irresponsible for people to be talking blithely about Pigouvian taxation as a solution to global warming, when what would actually happen is a few rich nations shuffle some money around between themselves and the world gets screwed anyway and most of the victims don't see a dime because of it? Seems to me that focussing on changing carbon emitting behaviour is a more sensible approach. Is my reasoning flawed? it wouldn't surprise me.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-6048425.post-53757641705846250022008-09-11T09:45:00.000+00:002008-09-11T09:45:00.000+00:00Well, you could argue that the rich-world carbon t...Well, you could argue that the rich-world carbon taxes *aren't* going to be redistributed to poor African nations to compensate them for the effects of global warming. Instead they'll probably substitute for other taxes (e.g. on rich-world labour). I suppose that's the same point you make about moving wealth from the garden guy to the car guy.MrArthttps://www.blogger.com/profile/10381891846798666282noreply@blogger.com