Monday, November 30, 2015

Pigou, the Government and Economists

I am not a fan of Pigou taxes. Also many alleged right wing leaning economists support this tax. Yes it is a tax. A tax is anything the Government takes from a provider of goods or services, or an individual or company, and then decides on its own how to use those funds. Taxes do not solve problems they provide a currency for politicians to garner favor.

In a recent piece by Masur and Posner (Toward a Pigouvian State, U Penn Law Rev, V 164, p 93) the authors extol the virtues of such a tax. They state:

A Pigouvian tax is a tax equal to the harm that the firm imposes on third parties. For example, if a
manufacturer pollutes, and the pollution causes a harm of $100 per unit of pollution to people who live in the area, then the firm should pay a tax of $100 per unit of pollution. This ensures that the manufacturer pollutes only if the value of the pollution-generating activities exceeds the harm, such that the social value of those activities is positive.

Now simply the Pigou tax is a way to control the costs of externalities. The classic case is a railroad whose trains emit sparks and the sparks ignite corn fields. The Pigou tax would have the Government assign a tax on the railroad as an incentive to improve the rails and eliminate the tax. What happens? The Government collects the money, the railroad increases its prices, the corn still burns down but the politicians have more money to spread around for votes! Not very efficient unless you are a politician.

The Coase approach is to allow each person harmed to sue the railroad at some minimal cost and to have laws allowing that. Then the railroads will get tired of the law suits, the farmers will get reimbursed and we employ more lawyers outside of the Government. Somewhat of a win-win type result.

The authors of this piece state:

Finally, a more fundamental objection to Pigouvian taxes comes from Ronald Coase’s classic article, The Problem of Social Cost. Coase attacked Pigouvian taxes because they do not take into account the possibility of bargaining.  Consider the example of the factory that pollutes and causes harm to neighboring residents. According to Coase, the neighbors could pay the factory to reduce pollution; if they do so, the socially optimal level of taxation is achieved without the necessity of government intervention in the form of a tax. And if (as seems likely) the government may err in setting the tax, then the outcome will be inferior to one that is reached through bargaining.

What Pigou taxes do for pollution and emissions is to tax those who could least afford it, and make them pay for the benefit of the politician. Coase is correct. Pigou is just another tax and spend liberal supported by Republicans, especially economists!