Pigou, Taxes, Horses, and Nonsense

As many of you know I am not a great fan of Pigou Taxes as sold to us by some left wing "Republicans". In essence they tell us that by placing a tax on say the purchase of gasoline, albeit inelastic in demand, that by the Government collecting the money it will be good for the economy. Never got that idea.

As promoted by a famous Harvard economist, who must get to Harvard by means which are quite elastic, an article in the National Journal by some writer who appears to have in my opinion only half of the idea states:

But Pigou realized that if a producer wasn’t paying for the full cost of producing a good, they would produce too much of it anyway and everyone else would foot the bill. Imagine that making glue is expensive because it costs a lot to cart away all the horse carcasses used in its production. There’s not going to be a lot of glue because only people who really like glue will be willing to pay to produce it.

Now imagine that instead of carting away the dead horses, glue factories realize they can dump them in nearby rivers for free. All of a sudden, it becomes a lot cheaper to make glue, so the price goes down. At a price like this, you can’t afford not to buy glue, so people consume more of it, and new glue factories pop up.

It all looks like economic growth, until the dead horses start piling up, and people start getting sick. Then they get a bunch of medical bills and the government has to spend money cleaning up the river. The sticky-fingered glue barons don’t mind much, because they can afford to buy the expensive houses upriver, and when the cost of cleanup gets spread to everyone, the cost to them is a pittance compared to their newfound glue fortunes.

Meanwhile, the tape users are fuming. They’re getting sick from glue they don’t even use, and the horse-dredgings are driving up their tax bill. And because a bunch of the former tape-makers have jumped on the glue bandwagon, there’s now a tape shortage. It’s a mess.

When you account for the costs of sickness and cleanup, each tub of glue costs $20 to produce. But the glue factories don’t pay for this, so they can sell glue at a going rate of $12. Glue that’s only worth $12 is being made at a cost of $20, so $8 is being wasted on each new tub of glue.

In this case, Pigou would prescribe an $8 tax on glue. Now, it costs glue factories $20 to produce glue, and only people willing to pay that much for glue will buy it. Less glue is produced, so fewer dead horses end up in the river, and the revenue raised from the tax can be used deal with the problems caused by the ones that do.

Now let us examine this logic, I am being kind of course. 

1. If we can determine that the cost of picking up the carcass of the deal horse is $8 per bottle of glue soled, then we could collect that from a variety of ways. We could tax the producer, namely we could invent a way to have the town or State pick up the horse and then to tax the glue producer for the carcass removal. Or we could put a tax on the sale of the glue, and then have the buyer expressly pay. In either case it should add to the cost. But alas what may have happened is that we taxed everyone, glue users or not, for the removal, then as any good Government entity does, it over spends, and we get that allocation of an added tax. Like CATV and sports. In either case the dead horse is gone and someone is paying.

2. Now we have argued that a Pigou like fee, let's not call it a tax, can be determined for certain externalities; obesity and dead horses. We can also find an allocation process to collect the right fee. Namely we know the seller or buyer or user and then we can allocate directly; glue buyers or weight measurements. Now "carbon" and fuel usage is not so easy. First despite what all the political type researchers say we cannot demonstrate a measurable cost to carbon release. There are all sorts of "projections" but it is not as clear as a dead horse or a big gut! So the one to one allocation between users and costs does not exist.

3. Replacement for a user is available for the obese, they can live longer and better if they cut back, and from the horse, it really smells less. But gasoline usage is inelastic the more one goes down the economic ladder. Our Harvard professor may take his blue limo or his black limo. He can choose the Mercedes or the BMW. But the poor Harvard floor cleaner has a twenty year old junker he drives in from the south shore everyday and that is all. He may have a day job at McDonald's that requiring the car as well. He most likely has no discretionary travel.

Thus as I have argued so many times, the Pigou Tax, Fee, Charge, works if and only if we can identify a negative externality, place a price on it to society, can then lay upon it a fee and collect it, and to use the fee to pay for the cost! That just does not work with Pigou Taxes on gasoline. You see, from my simple minded MIT engineer mentality, you know, facts and all that stuff, we have no idea what the cost is, and secondly and most importantly we all know that the Government will not and cannot use the funds collected for the purpose intended. Just look at Social Security!

So this Harvard professor want me to believe that he has a better idea. I really do not think so. Unless we abandon all logic. And yes, the facts as well.