Is Pigou the Economic Zombie?

As my readers know I am not a fan of the Pigou tax. Namely if some human action has an externality effect whose cost is not paid by the person acting, then the Government should tax this act and recoup the cost of the negative externality.

For example, if a railroad uses coal steam engines to pull its commuter cars and the cars spew coal ash across some residential area then the Government should have the right to tax the railroad to recoup the social costs. Do you see the fallacy here? Simple, it is a cost to the residents and not the Government and the Government is not an effective re-distributor to the harmed entities. It tends to spend money to maximize the chance of the politicians in office to stay there.

Now consider my favorite example, obesity. We know just how much it costs, on average, for every point above 25.0 of BMI, body mass index. The costs are not linear but quite nonlinear so that the costs of a 30.0 are not 4 time the costs of say a 26.0. In fact a 30.0 may be exponentially greater. But we can calculate the, I have. Thus we know costs and then we could tax the offenders and collect the money to be dispensed to health care providers caring for these people. In this case the negative externality is weight and subsequent disease and its costs.

Now a week ago the NY Times had a piece on Pigou taxes in the context of social annoyances. It has been gnawing at me ever since. Why, because it makes little if any sense as I have explained Pigous taxes.

The article states:

Republican economists, like Mankiw, normally oppose tax increases, but many support Pigovian taxes because, in some sense, we are already paying them. We pay the tax in the form of the overcrowded roads, higher insurance premiums, smog and global warming. Adding an extra fee at the pump simply makes the cost explicit. Pigou’s approach, Mankiw argues, also converts a burden into a benefit. Imposing taxes on income and capital gains, he notes, punishes the work and investment that improve society; taxing negative externalities allows the government to make money while discouraging activity that hurts the overall economy. 

 It continues:

Economics offers no objective criteria for deciding what to tax or by how much. That’s one reason many libertarians, like Russ Roberts, a George Mason University economist, will never join the Pigou Club. Sure, he says, externalities exist, but that doesn’t mean the government needs to tax them. Yet in the past few weeks, there has been intense discussion among some economists about one particular externality: the social cost of gun ownership. A National Bureau of Economic Research study by Philip Cook and Jens Ludwig determined that guns cost society, on average, a minimum of $100 each and as much as $1,800. Some economists say that a Pigovian tax on weapons, rather than strict regulation, could break the political impasse on gun control. 

Now I am not a gun fan, although I do own a Daisy BB rifle in New Hampshire to chase the deer away from my chipmunk farm, but that is a tale for another day. Both of these tales fail to tell the correct economic story.

Pigou taxes are very complex.

First, if we want to reduce the use of something, then taxing it may be a way to do it. Say auto emissions. But for the poor folks who drive long distances to work, since they cannot afford to live closer, it is just another tax. The Harvard Professors may not realize that, but it is a true fact.

Second, if we are trying to recover a cost, we better know what the cost is. In obesity we can and do. In emissions we really do not.

Third if we want to compensate for the cost of the negative externality than in obesity we can. We collect on a BMI basis and then repay back to the health care providers the amount collected. Government gets to keep nothing. If you think that will work then I have a bridge to sell you.

 Fourth, objective criteria exist for obesity, cost per person per BMI unit. We have it, we can index it, it is real. So the argument is not correct. As for gun ownership it really is uncertain. For there the solution may be simple; ban certain weapons, be more aggressive with mental illness issues, and give and enforce stiff sentences for law breakers who do so with guns, any lawbreaker. But that has nothing to do with Pigou, unless you tax guns to pay for incarceration, but that really is not Pigou, it is a penalty at best.

So is Pigou reasonable anywhere? Possibly, but it really assumes that it does good and not harm, and that is taxes the users where they have a clear alternative to select a non taxable choice. Fuel is not one of them no matter what they say at Harvard Obesity is!