Pigouvian taxes 1/14. Pigouvian taxes. The Economist. Aug 19th 2017

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1 1/14 Pigouvian taxes The Economist Aug 19th %

2 2/14 Externalities Loud conversation in a train carriage that makes concentration impossible for fellow-passengers A farmer spraying weedkiller that destroys his neighbour s crop Motorists whose idling cars spew fumes into the air, polluting the atmosphere for everyone %

3 3/14 Market prices Market prices of rail tickets, weedkiller or petrol do not take these wider costs, or externalities, into account %

4 4/14 positive externality a new road may benefit communities by more than a private investor would take into account Still others are more properly known as internalities. These are the overlooked costs people inflict on their future selves, such as when they smoke, or scoff so many sugary snacks that their health suffers %

5 5/14 Alfred Marshall and Arthur Pigou Alfred Marshall: The first to layout the idea of externality His student Pigou: uncomfortable with strangers, but intellectually brilliant Pigou succeeded Marshall to become head of the economics faculty when he was just 30 years old %

6 6/14 The Economics of Welfare Central theme: self-interest will not... tend to make the national dividend a maximum Chimney smoke in London meant that there was only 12% as much sunlight as was astronomically possible Such pollution imposed huge uncharged costs on communities, in the form of dirty clothes and vegetables, and the need for expensive artificial light %

7 7/14 Ways of tackling externalities Some things should be regulated Other activities ought simply to be banned. No amount of deceptive activity adulterating food, for example could generate economic benefits But he saw the most obvious forms of intervention as bounties and taxes 50 %

8 8/14 Bounties and taxes These measures would use prices to restore market perfection and avoid strangling people with red tape This is now known as Pigouvian tax Levies on drivers to counterbalance the externalities of congestion and pollution are common in the Western world Taxes to fix internalities, like those on tobacco, are pervasive, too (also fix externalities) %

9 9/14 Global warming Pigouvian taxes are also a big part of the policy debate over global warming Finland and Denmark have had a carbon tax since the early 1990s, Chile and Mexico since 2014 British Columbia s carbon tax reduced fuel consumption and greenhouse-gas emissions by an estimated 5 15% %

10 10/14 Theoretical challenges But there are flaws in Pogou s idea: both theoretical and practical Coase considered externalities as a problem of ill-defined property rights If it were feasible to assign such rights properly, people could be left to bargain their way to a good solution without the need for a heavy-handed tax %

11 11/14 Property rights Coase s example: a confectioner ( 甜品工廠 ), disturbing a quiet doctor working next door with his noisy machinery Just assigning property right would solve the problem, no tax needed %

12 12/14 Ronald Coase In most cases, the sheer hassle of haggling ( 討價還價的麻煩 ) would render this unrealistic, a problem that Coase was the first to admit But his deeper point stands. Before charging in with a corrective tax, first think about which institutions and laws currently in place could fix things %

13 13/14 Policymakers Now on policy decision: How to set level of the tax? The span of estimates of the economic loss to humanity from carbon emissions is unhelpfully wide as a result, ranging from around $30 to $400 a tonne %

14 14/14 A solution Pigou handed economists a problem and a solution, elegant in theory but tricky in practice He was sure, however, that the effort was worthwhile Economics, he said, was an instrument for the bettering of human life. 100 %