Skepticism on Pigovian Taxes

Greg Mankiw has written recently in favor of Pigovian taxes, particularly for gasoline or carbon:

As readers of this blog know, I am a fan of Pigovian taxes. These taxes allow us to correct market failures without heavy-handed regulations, while raising government revenue so we can reduce more distortionary forms of taxation.

I am not alone in this view. Here are a list of some economists and pundits who at times have advocated higher gasoline taxes or carbon taxes:

• Greg Mankiw (Fortune 5/24/99, WSJ 1/3/06, 5/31/06)
• Bill Nordhaus (Foreign Policy in Focus 3/27/06)
• Martin Feldstein (WSJ 6/4/92)
• Gary Becker (Businessweek 5/27/02)
• Robert Frank (NY Times 2/16/06, 6/8/06)
• Greg Easterbrook (NY Times 5/25/04)
• John Tierney (NY Times 10/4/05, 5/23/06)
• Jonathan Rauch (National Journal 2/9/02)
• Thomas Friedman (NY Times 9/21/05, 2/8/06, 6/16/06)
• Joe Klein (Time 5/7/06)

I call this group the Pigou Club. We are looking for more members.

The case for Pigovian taxation is compelling in theory.  And replacing drug prohibition with Pigovian taxes would be a dramatic improvement in policy.  I am nevertheless more cautious about Pigovian taxation than Greg.

One problem is that if a Pigovian tax gets too high, it generates a black market.  This outcome is not especially likely, since politicians will normally recognize that driving a market underground deprives them of revenue to spend.  But there are some instances, such as for alcohol and tobacco, where high Pigovian taxes have induced wasteful evasion or cross-border shopping.

A second difficulty occurs when Pigovian taxes apply to goods such as alcohol.   The argument for taxation in this instance is that alcohol use can generate externalities like driving accidents.  Many people consume alcohol without generating externalities, however, and they are strictly worse off under Pigovian taxation.  So the net efficiency effect is not necessarily positive.

This raises a more general point: determining which goods generate the most externalities is tricky at best.  The classic illustration is cigarettes.   One the one hand smokers harm others by using publicly-funded health care.  On the other hand smokers die young before collecting Social Security and Medicare.  So the net externality is not obvious, and some exising estiamtes suggest the right Pigovian tax should be lower than current rates.

Still a further concern, especially given the difficulty of knowing exactly which goods to tax, is that political concerns or popular opinion, rather than careful calculation of externalities, might determine which goods get taxed.  Perhaps fatty foods cause obesity and therefore more use of publicly funded health care.  Perhaps late night-television makes people sleeply and thus reduces industrial productivity.  It seems unlikely policy would ever impose Pigovian taxation on these goods, however; they are just too popular.  So instead Pigovian taxation concentrates on politically unpopular goods like cigarettes.

Some of the concerns raised above do not necessarily apply to a carbon tax, so perhaps there is still a case for this particular policy.  But once the door is open to Pigovian taxation the likelihood of other applications increases, and the actual taxes adopted might be worse than nothing at all.  That is why I am skeptical about, but not unalterably opposed to, Pigovian taxation.

Comments

[Mike Huben]

Miron says: "... determining which goods generate the most externalities is tricky at best. The classic illustration is cigarettes. One the one hand smokers harm others by using publicly-funded health care. On the other hand smokers die young before collecting Social Security and Medicare. So the net externality is not obvious..."

The Price of Smoking: "What does a pack of cigarettes cost a smoker, the smoker's family, and society? This longitudinal study on the private and social costs of smoking calculates that the cost of smoking to a 24-year-old woman smoker is $86,000 over a lifetime; for a 24-year-old male smoker the cost is $183,000. The total social cost of smoking over a lifetime -- including both private costs to the smoker and costs imposed on others (including second-hand smoke and costs of Medicare, Medicaid, and Social Security) -- comes to $106,000 for a woman and $220,00 for a man. The cost per pack over a lifetime of smoking: almost $40.00."

I found this within a minute of search, and I'm not an economist.

Why does Miron make these careless, erroneous assertions? Why do libertarians have a standard of evidence and argument that is as low as creationists?

[SteffenH]

@Mike:

This study estimates private and social costs, no benefits. Private costs legitimise no pigovian taxes. What is the cost-value-ratio? Medicare and Medicade crosssubsidize health costs of smokers. Same with high-risk-sports-activities and health care costs of sedentary life stile. It's a problem of a nationalized health care program not smoking.

Get your economics right. Try Pierre Lemieux: The Economics of Smoking (http://www.econlib.org/library/Features/feature5.html)

[Mike Huben]

I've taken a look at Lemieux now, and he's rather comical.

Most obviously, he relies heavily on "tu quoque" arguments: other things are bad, so we shouldn't complain about smoking. Who can take such blatant fallacies seriously?

He blithely presumes perfect consumer sovereignty, an assumption not shared by all economists: "Statistics show that half of non-smokers are former smokers, which suggests that quitting is not infinitely costly. Many smokers claim that they would like to quit, but that they are unable to. Words are only words and, in the economist's eyes, an actual choice to smoke reveals that, all costs and advantages being considered, this is what the smoker prefers to do."

I could pick more holes in his arguments easily, but what's the point?

If you look at the figures I posted above, roughly 20% of the costs of smoking are externalities.

Page 5 points out that it's no longer clear who is subsidizing who after excise taxes and the Master Settlemetn Agreement, which effectively are Pigovian taxes. So that seems to say that government HAS found the appropriate level of Pigovian tax. And it's fairly obvious that it's a whopping amount of money.

Maybe, Steffen, you should learn that economic arguments rely on many assumptions which are conveniently and silently presumed by ideologues whenever it's convenient.

[James]

Huben,

If you want to disagree, fine, but at least be kind enough to actually disagree with what JM is saying. Otherwise you might lull some careless person (perhaps yourself) into thinking that you have actually provided evidence that undermines his claims.

Miron is speaking of "determining which goods generate the most externalities," that is, determining which goods create worse externalities relative to other goods, and "the net externality..." i.e. the sum total of the externalities of smoking.

I have no disagreement with the work you link to, but it doesn't even compare the externalities associated with smoking against the externalities associated with different goods. Since neither you nor I has read the book, we don't know if it addresses net externalities.

Re: Lemieux, he's not committing tu quoque fallacies. Rather, he's asking the rhetorical question "You anti-smoking folks claim to be concerned about some problem X. So why do you ignore more serious instance of X and focus on a less serious instance?" You should look up the principle of charity in argument. If you apply it you won't make this sort of error quite so often.

[colin leakey]

The Prof (A.C.P) was a very good family friend when I was young. I have sjust written up some personal memories and recoverd a 1942 photograph if anybody is interested. Colin Leakey
(Biologist not Economist)(Kings College 1955-59 and Visiting Fellow 1973.

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