In almost any economics textbook, one will find a discussion of market failure. The conversation will usually go something like this: markets are great, but sometimes they fail. If operating costs are low, no government solution is needed. But if operating costs are high, the government can (and should) step in to correct the failure. One of the methods often recommended to correct market failure is the original one from the British economist Arthur C. Pigou: taxes.
A Pigouvian tax is a tax designed to correct a specific market failure: negative externalities. A negative externality is a situation where costs are imposed on an outsider who is outside the function. Since they are not part of the transaction in the first place, the amount of money that happens in the market does not fully reflect their costs. Thus, a tax can be used to increase the market price, reduce the price in the market, compensate for fixed costs, and market failure is eliminated. Negative externalities seem to abound in society (dirt, bad smells, cigarette smoke, etc.). In addition, transaction costs are high (just imagine if a power plant had to negotiate with everyone affected by its smoke!). Therefore, you have many economists who take Pigouvian tax demand as a given.
However, I am still very small. While I understand the concept of the Pigouvian tax, I reject it as a viable solution; I don’t think they are the first-best, or even the 12th-best solution to market failure. Public Choice economics gives us great reason to question government-imposed market failures, even so-called “market-based” interventions such as Pigouvian taxes or cap-and-trade. The assumption behind Pigouvian taxes (or any government intervention in the economy) is that the government is a benevolent dictator; it wants to do the right thing and it can do it unilaterally. But Social Choice teaches us that we must consider the world as it really is as opposed to another fixed situation.
In the real world, the government is neither benevolent nor tyrannical. Government agents aren’t kind, but they don’t hold grudges either. They, like the rest of us, look out for their own interests. They want to keep their jobs, they want to do a good job, they want to go home to their families at the end of the day, etc. They have hopes, dreams, and aspirations. And they act according to their own motives and goals, which may be different from most people. What incentive, then, is there for them to allocate the “right” tax to solve the externality, or even to gather all the information necessary to properly allocate it?
In the real world, government (at least in the United States) is not a dictatorship. It has many functional parts. Most policy decisions are made in committees, or determined by a vote of Congress. Policy makers and decision makers consider many, many different stories. Therefore, the policy often deviates from the theoretical perspective and insists more on political correctness. (By that I mean: policy is good for some politics objective rather than some non-political goal.)
In a recent post, Pierre Lemieux highlights one such case of politically correct policy: prices for electric cars made in China (EVs). We are often told that global warming is an important issue that requires significant government involvement. Indeed, it is the justification for many government subsidies for green energy (reverse Pigouvian tax) and carbon tax. From that point of view, the prices on EVs made in China don’t make sense. If there is a negative externality, and there is a product on the market that can reduce the externality, then why effectively prevent it? Answer: because those cars did not exist it is politically correct. They solve market failures, but not in the way that politicians want. Therefore, the administration, looking to protect its voter base and achieve its goals of staying elected, chose to take action that made it even worse rather than better. All in the name of stopping the outside.
Why do I oppose a carbon tax? Because I see no reason why and it cannot be subject to such political correctness. Even if it were possible to calculate the necessary tax precisely and without cost, why should we believe that it will not be implemented and designed in a way that favors certain groups and benefits politics policies rather than economics?
Jon Murphy is an assistant professor of economics at Nicholls State University.
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