Responding to two blog posts by me again Kevin Corcoran in skepticism about Pigouvian taxes, Scott Sumner gives the example of a density tax in Orange County that was a great success. Scott writes:
This example shows that not all Pigovian taxes fail. Other achievements include congestion charges in cities such as Singapore, London and Stockholm.
Scott could add Fairfax County, Virginia, to his list. I-66 runs from Washington DC through Fairfax County and out into West Virginia. 66 was a restricted highway: during rush hour, only people living in parking lots could use it (and there were heavy fines for violators). However, 66 were always supported. In 2017, the Department of Transportation removed the HOV limit and opted to switch to variable tolls during rush hour. Tolls will increase or decrease depending on volume with the goal of keeping the average speed on I-66 at 55 (speed limit). This was a great success. The introduction of variable charging has virtually eliminated traffic congestion. This variable taxation is a form of Pigouvian taxation.
The Pigouvian tax and I wholeheartedly celebrate it. In grad school, I went 66 a lot. I wasted God knows how many hours sitting on the road. When variable pay was introduced, I could easily choose whether the value of my time was worth getting paid.
In our writings, Kevin and I talk about doubts. I’m skeptical of market failure corrections, but I’m not against them in part. There are situations where they can work. As always, the devil is in the details.
One of the reasons I doubt Pigouvian taxes is that governments can be slow to adjust taxes (up or down). There are a lot of political distractions, special interests are getting involved, and the political process is just slowing down. Thus, the tax may be too high or too low for a long time, leading to unfavorable results. One of the good things about congestion taxes, especially like the I-66 toll, is that they can be easily fixed. The I-66 toll is completely automatic. Go up and down quickly to adjust the level of traffic. There is no need for votes, lobbying, or other expensive procedures. Maintenance costs are low.
Furthermore, the negative (or positive) effects of a congestion tax are immediately apparent. One can quickly see an increase in traffic or a decrease in the tax rate. Tax analysis costs are low. In contrast, a carbon tax has very slow effects. The negative (or positive) effects of carbon emissions can take years to emerge. The cost of analyzing the carbon tax is very high.
Finally, at least in the case of I-66, the toll is collected via a transponder that most vehicles have (or a bill is sent in accordance with the registration attached to the vehicle’s license plate if no transponder is present). The tax is collected immediately; there is no need for measurement or auditing. Tax administration costs are low.
I support density taxes. After spending hours sitting in Boston traffic (as I’m sure Scott did), I wish our country could do the same on those highways. A congestion tax manages to overcome my doubts.
The point of my post on fixing market failures is not that such actions should never, ever be done. It is not that they will fail. Rather, it is to remind economists and students of our basic lessons: there is no such thing as a free lunch. Market intervention is inexpensive. However, many economists treat them as if they are. Your average econ textbook will give you a brief overview of market failure along the lines of: “Markets work well. But when transaction costs are high, markets fail and the government can/should intervene.” I try to apply the natural skepticism of the economist to these decidedly non-economic lines of thought. We have to compare real-world alternatives. Most market participants fail to do that: they simply see the market fail again think government intervention will make it better. We, as economists and scientists, must be skeptical everything plans. We must look at ourselves realistically. We have to check the details, because that’s where the devil lies. That doubt can be overcome. But it needs to be there.
Interestingly, this is where social choice analysis begins. Without public choice, the benefits of flexible or automatic payments are not obvious. But public choice teaches us to examine politics outside of romance, that the incentives faced by politicians are not the same as the incentives faced by people who interact directly with the market with guiding prices. In the general economy, all else being equal, having a tax imposed by a committee or a tax imposed by automatic variable payment would be equally preferable. A public-choice economist recognizes that the two approaches are not equally attractive. One can lead to a worse outcome than the other.
Jon Murphy is an assistant professor of economics at Nicholls State University.
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