In economics textbooks, you will find arguments like this: Market failureThe conversation usually goes something like this: markets are great, but they sometimes fail. If transaction costs are low, then no government bailout is needed. But if transaction costs are high, then governments can (and should) step in and correct the failures. One of the most common ways proposed for correcting market failures comes from a British economist: Arthur C. Pigou: tax.
A Pigouvian tax is a tax designed to correct certain market failures, i.e. negative externalities. A negative externality is a situation in which costs are imposed on third parties outside of a transaction. Because they are not part of the original transaction, their costs are not fully taken into account in the monetary price incurred in the market. Therefore, a tax can be applied that increases the market price and reduces the market volume, thus compensating for the imposed costs and removing the market failure. Negative externalities seem to be pervasive in society (pollution, bad odors, passive smoking, etc.). In addition, transaction costs are high (imagine if a power plant had to negotiate with everyone affected by smog). As a result, many economists take the need for a Pigouvian tax for granted.
However, I am in a significant minority: while I understand the logic behind the Pigouvian tax, I reject it as a practical solution. I don’t think it’s the best solution to market failure, nor do I think it’s the 12th best solution. Public Choice Economics Even so-called “market-based” interventions like the Pigouvian tax or cap-and-trade give us great reason to be skeptical of market failures imposed by governments. The assumption behind the Pigouvian tax (or any government intervention in the economy) is that the government is a benevolent dictator, trying to do the right thing and being able to do it unilaterally. But public choice tells us that we have to take the world into account. as a matter of fact Contrast with the ideal alternative state.
In the real world, governments are neither benevolent nor dictatorial. Government officials are not benevolent, but they are not generally malicious either. Like all of us, they have their own interests at heart. They have different hopes, dreams, and desires: to keep their jobs, to do a good job, to go home to their families at the end of the day. And they act in accordance with their own motivations and goals, which are probably different from most other people. So what incentive do they have to allocate the “right” taxes to solve externalities, or to gather all the information needed to allocate them appropriately?
In the real world, governments (at least in the United States) are not dictatorships. Governments have many functional departments. Many policy decisions are made in committees or by votes in Congress. Policymakers and decision-makers are many, many Different problems. As a result, policies often stray from theoretical ideals and lean in the direction of political correctness (i.e., policies are correct in some respects, but Political It is more of an apolitical goal.
In a recent post, Pierre Lemieux highlighted one example of a politically correct policy: Tariffs on Chinese-made electric cars (EVs). We often say that global warming is a big problem that requires major government involvement. Indeed, many of the government subsidies for green energy (inverse Pigouvian taxes) and carbon taxes are the reason for this. From this perspective, tariffs on Chinese-made EVs make no sense. If there is a negative externality and there is a product on the market that can mitigate that externality, why effectively ban it? The answer is that these cars are Politically correctThey solved market failures, but not in a politically desirable way, so the administration chose to act to eliminate the externalities in order to protect its voter base and achieve its goal of staying in the election. bad In the name of stopping externalities rather than getting better.
Why am I against a carbon tax? Because I see no reason why it should be immune to political legitimacy. Even if we could calculate exactly how much tax we needed accurately and cheaply, why would we believe that it wouldn’t be implemented and designed in a way that favored certain groups? Political A goal that is not financial?
John Murphy is an assistant professor of economics at Nicholls State University.
