John Murphy recently explanation He explains his skepticism about using taxes to offset market failures by stating that the use of taxes is inevitably distorted by political incentives, and these incentives may not be entirely consistent with the social interest.
I think this is a big problem, too. My favorite recent explanation of this problem is by Scott Alexander. Alexander gives the example that, in theory, you could use taxes or subsidies to encourage people to eat healthier. But Alexander goes on to say:
You’re probably thinking this is an argument that vouchers + taxes/subsidies are a great solution. No, they’re not. What I’m saying is that in principle they are a great solution. In practice they have failed spectacularly because they subsidize the least healthy foods and limit the production of healthy foods.
After giving numerous examples of the types of subsidies and restrictions that result from real political processes, Alexander concludes, “Given our current administration, the government should never be allowed to dictate what anyone eats. To presume that the people administering this program might be competent, competent people acting in the public interest is to say that what has already happened will not happen.”
But there are other reasons why I’m skeptical of this approach, even if you eliminate all questions about political incentives. But first, a (seemingly) random aside: how does time-restricted eating affect a person’s weight?
Time-restricted feeding (also known as intermittent fasting) is a relatively popular method that people use to help them lose weight. Time slots vary, but the most common method is called the 16:8 method, which involves eating meals spaced 16 hours apart and consuming all food during the remaining 8-hour window. People who practice this method skip breakfast, don’t eat anything caloric until noon, and eat between 12 noon and 8 pm. They then wait until noon the next day to start eating again.
Diet and nutrition studies are notoriously difficult to conduct and often produce quite variable results. However, there was a very interesting meta-analysis that looked at the effects of time-restricted eating among Muslims who observe Ramadan, a practice of fasting between sunrise and sunset that, as the study noted, can last anywhere from 9 to 22 hours depending on distance from the equator. It’s also a practice practiced by hundreds of millions of people, giving you a much better sample size than most nutrition studies.
So how does this affect people’s weight? The answer is “everyone.” It has a whole range of effects on people’s weight. Some people who fast during Ramadan lose weight, some maintain their weight, and some actually gain weight. Some people lose weight because restricting the time available for eating means they take in fewer calories than normal. On the other hand, towards the end of the fasting period, their body goes into a state known in technical terms as “super hungry,” which causes them to overeat when the eating period begins, and ultimately more For some people, the effects of eating more are more than if they ate more food throughout the day, and for others, the two effects essentially balance out, so that the total calorie intake remains the same. put “The effect of Ramadan fasting on body weight varies from individual to individual and ranges from weight loss to weight gain, depending on whether energy intake during non-fasting periods is insufficient or excessive to compensate for the deficit in energy intake during fasting periods.”
So what does this have to do with the use of taxes or subsidies to offset market failures? Well, such uses of taxes and subsidies implicitly assume that people will respond in specifically predictable and desirable ways to the taxes or subsidies. And just as people’s total caloric intake responds in different ways to a time-restricted diet, people may respond in different ways to taxes or subsidies.
One famous example is Cobra EffectAs I explained in front:
The British government wanted to reduce the number of cobras (in India) and decided to pay people for each cobra they killed. It seems logical, but the policy makers didn’t anticipate the reaction from the people: many people started breeding cobras in large numbers, killing them and selling their skins to make money. Eventually the British government realised what was going on and stopped the scheme. As a result, snake breeders released the now worthless breeding cobras. As a result, the cobra population actually dropped to Increased.
It was decided that eradicating the cobra population would be a good thing. Externalitiesand the market determined that there was a shortage. Policy makers subsidized the killing of cobras, expecting that this would lead to an increase in cobra hunting, thus offsetting the market failure by increasing cobra culling to a socially optimal level. However, people did not respond as the policy makers expected: instead of hunting cobras, people started breeding them. Thus, attempts to reduce cobra populations using subsidies had the opposite effect.
But is this merely an exceptional case? Or is there reason to think that our inability to predict people’s reactions to taxes and subsidies is the rule rather than the exception? In a detailed review of Jeffrey Friedman’s book Power without knowledgeI Argument Friedman argued that this problem is the rule, not the exception, which undermines the case of technocratic-minded economists who imagine that they can manipulate the behavior of society as a whole simply by creating the “right” incentives through taxes and subsidies. Friedman argued that “incentives alone cannot actually produce behavioral predictions, that is, policy advice.”
Friedman argues that the reason is that “knowing that perceived incentives influence the behavior of these agents is useless for predictive purposes unless economists know exactly.” how It influences it. But to do so, we need to know exactly how agents interpret the situation in light of their perceived incentives. Incentives only “matter” if they interpret the situation in the same way as economists do. In ways that economists could predict.But as Friedman is at pains to argue, people see and think differently, so their responses to given incentives are diverse and unpredictable. As a result, economists (and policymakers more generally) lack the ability to predict “future agents’ subjective interpretations of how they will behave under future circumstances.” The agents themselves perceive and interpret them.”
An illustration of this problem is Scott Hodge’s recent book. Taxocracy: What you don’t know about taxes and how they control your daily lifeIt’s a fairly enjoyable, light-hearted read. Hodge outlines various examples of how people’s reactions to taxes – reactions that tax-makers did not anticipate – have produced a variety of unexpected results over the centuries. Some are simply amusing, such as the example of old French houses built like mushrooms, with a relatively narrow first floor and a wide second floor. He explains that the houses were built this way because “property taxes were based on the square footage of the land the house occupied, so people would fool the tax collectors by designing the first floor to be narrow and the second floor to be wide.”
But the results can be uninteresting and disastrous. King William III assumed that houses and buildings with many windows were more likely to be owned by wealthy people, so he imposed a tax on windows. This would serve as a way to tax the wealthy. However,
The tax “made life especially miserable for the urban poor, as landlords blocked up windows and built tenements that lacked adequate light and ventilation.” Some buildings had no windows on some floors, leading to “the spread of many diseases, including dysentery, gangrene, and typhoid.”
To be sure, in both cases the tax was not enacted as a means of correcting a market failure, but the fundamental problem that people respond in unpredictable and varied ways to taxes (or subsidies) applies equally whether the tax (or subsidy) is intended to correct a market failure or for the more general purpose of simply raising revenue.
Friedman argues that this weakens the argument in favor of technocratic policies, which include the use of taxes and subsidies to change behavior to correct market failures. Friedman argues that “if we have reason to think that the consequences of a particular action (such as a particular technocratic action) cannot be known with precision, then knowledge of the beneficial consequences of taking that action is indispensable.” basis “We cannot support technocracy because we lack such knowledge, as technocracy requires. Similarly, if a defender of technocracy acknowledges that technocracy may produce unintended consequences, but does not know what those consequences might be, then her supposed knowledge of technocracy’s beneficial consequences (preventing, mitigating, solving social problems) is no basis for technocracy, because she lacks knowledge of what is on the cost side of the books.”
So even in the absence of politically inconsistent incentives (which are themselves a very real problem), there is another problem with trying to use taxes and subsidies to correct market failures, because, to paraphrase Friedman, if we have reason to think that we cannot know precisely the specific ways in which people would change their behavior in response to a Pigouvian tax or subsidy (and I think we have good reason to think so), then the claim that taxes or subsidies reduce market failures is no justification for the policy.
