Bryan Caplan Makes a Terrific Anti-Pigovian Argument
Thursday July 3, 2008
Bryan Caplan - Bryan Caplan Politely Declines to Join the Pigou Club. The entire argument is excellent (and worth reading). I would just like to comment on this:
I do agree with Caplan's conclusion:
My view is that people have a right to create all sorts of negative externalities, and other people basically just have to live with them. Unhappy campers have a right to complain about the externalities, refuse to associate with those who create them, or buy a large bloc of land and require visitors to abide by their rules. But they have no right to pass laws to do anything about most externalities. For example, even though I think education has important negative externalities, I don't want to do anything more than eliminate government subsidies for education.Since Bryan brought up murder... some statistics from the U.S.: The issues here go far beyond being mildly inconvenienced.
This does not mean, of course, that all negative externalities should be legal. Murder creates externalities, and I'm firmly against its legalization. But the right place to draw the line, in my view, is at physical trespass.
I do agree with Caplan's conclusion:
But until Pigovians forthrightly acknowledge that the right solution to most negative externalities is tolerance, not taxes, I'm not going to join their club.I do forthrightly acknowledge this. I do wish, however, that more economists took the issue of air pollution seriously.
Comments
Bryan Caplan’s concern appears to be with the decision, by the government/people, to take action against certain behaviors that those with influence consider to be bad. That’s an understandable position. My view is that we should separate the question of whether the government is justified in acting against a behavior from the question of how the government can best act against a that behavior. If the government is already committed to fighting or mitigating something, the first question is no longer relevant to the discussion. If the government/people are committed to war on exposed faces, the relevant issue is how to most efficiently inspire women to cover their faces. The tax may be economically more efficient than beatings or jail time or anything else that may accompany a simple law against bearing ones face. In that case, the Pigouvian argument could, in my opinion, be rightfully applied. The issue of WHETHER or not to act is separate and may not be determined by the Pigouvian view alone. I don’t think the Pigou Club needs to adopt a position on whether the government should act against gum on sidewalks or broken down cars on people’s lawns, but the Pigou Club’s ideas are likely applicable to the questions of how to do these things with the greatest economic efficiency.
Whatever mixture of circumstances that empowers any group, corporation or individual to be involved in an economic or other activity that creates “negative” externalities should be regulated, controlled or eliminated. Negative implies the contamination or destruction of an environment or the creation of materials that can cause ill health to a population. The basic point is politcal. Freedom includes many activities including economic. Freedom is always limited by the freedom of others. We all share in the glowing light of democratic freedom. Economic power is distributed unequally. This power or any power should not be exercised to the point of infringement on the rights of others. Of course those rights are LIFE, LIBERTY and the PURSUIT OF HAPPINESS. Unregulated economic activity is both dangerous and dictatorial. Capitalism is not perfect and sacrosanct. The invisible hand is not the hand of GOD but the hand of greed.
I think I am missing something here. I understand the property rights/individual rights argument that Caplan is making, but as an economist, he is failing to account for the efficiency argument. That is, the economic argument for the regulation externalities is about the misallocation of resources to their most productive uses. The market system that Caplan holds so dear (as do I) works if all costs and benefitsa are internalized by all actors in the market. Failure to capture external costs or benefits, by definition, results in an inefficient allocation of resources. To alleviate the inefficiency, a price for the externality has to be established. The tax is simply one way of doing this. To me, I prefer a trading system that allows the participants in the market to establish the price, but that is the point of the tax v. cap and trade debate. If we want to see whether the public cares about the cap, set the cap above current pollution levels and see if the public buys up the excess.
Looking from a Coasean perspective we should first try to solve the property rights problem before we discuss the instruments. Both instruments follow the polluters pay principle and as such they are only efficient if the polluter is the person who is able to reduce the damage with the least cost. As I understand Bryan he is refering to this problem. The initial allocation of property rights is crucial for the cost of abatement. If you tax a pollution people don’t have an incentive to avoid living in a polluted area, even this would be the least cost solution.
I don’t see how a tax on pollution would eliminate the incentive not to live in a polluted place. I thought that pollution itself would make that incentive present and that that side of the cost would be internalized, unlike the cost from the polluter’s point of view. Maybe I’m missing something.
Imagine there two possibilities to reduce environmental damage. One is you pollute and keep people outside the polluted area. The other is a tax on pollution. Imagine further it is cheaper to keep people outside than to reduce pollution to a healthy limit. If you tax in this situation it can’t be efficient to tax the polluter. So you are right, the remaining pollution still reduces the incentive to live in a polluted area, but the costs for the society as a whole are bigger because not living in the area at all would be the cheapest solution. Please read David D. Friedman “Laws Order: An Economic Account”, Chapter 3 & 4: What’s Wrong with the World, Part 1 &2: http://www.daviddfriedman.com/Laws_Order_draft/laws_order_ToC.htm