How about we just have them agree to not produce any more carbon than is naturally occurring? ;)

Large news item today, scientists have "discovered" methane, a greenhouse gas 20 times more potent than CO2, being naturally produced by decaying organic matter and living animals. My suggestion is to convert power plants to run on methane, convert CH4 to CO2 and H20, and save the planet! Oh, except that 95% of the greenhouse effect is due to water vapor. Never mind.

One of the worst offenders of pollution is China. Bottom of a lake is filled with filth. You can see the Yellow river turned red!

Only one thought here: You'd said that this Pigouvian tax is dual purpose. This was to encourage reduction by the producer and to use the governmental revenue to clean-up the damage.

Whether we can actually trust the government to do that with the money is another question, but I'm unaware of any accepted convention for "cleaning up" too much CO2 in the atmosphere.

Does this affect the efficacy of such a tax or system?

I have bad gut reaction to this concept of externalities. It sounds like another contrivance to justify greater governmental control over our lives. Who gets to determine what are pollutants? Who get to decide what the tax levy is? Who gets to decide the market limits? Do you expect government to act in the best interest of its constituents when answering question such as these. I think not

While the individuals affected are not part of the original transaction,, that does not give the company, corporation, or individual the authority to affect the individual rights of others. This is comparable to saying that I can defecate on my neighbor’s lawn as long as I pay a Pigouvian pollution tax or trade for some pollution credits on the fecal market. The fact is, that I do not have the right to make such a deposit in the first place and neither do factories releasing noxious chemicals. There are many ways the free market can punish businesses and individuals that adversely affect the rights of others – unless, of course, the said business or individual is protected by government in the first i.e. TVA. . Besides, how can an economic activity, like running a factory, be external to economics? Pollution or waste implies inefficiency, which implies it could be done better, which means competition can put your polluting ways out of business

One more thing: Carbon dioxide is not a pollutant. It is a vital plant nutrient and the natural result of animal respiration. Talk like that will lead to a Pigouvian pollution tax on breathing. You drink it in soda, beer, and champagne and outside of a few gastronomically satisfy belches it has no ill affects on human physiology. Carbon dioxide has to reach 15% of the atmosphere before it starts causing acidosis. One side benefit to increasing the carbon dioxide concentration is the improved growth of plants which will positively impact crop yield. Lets have more!

More Superfunds? Where has all the money gone, long time passing, where has all the money gone - into the pockets of attorneys, mostly every one. The brownfields are still brown but the lawyers are rolling in the green. Taxes on business are fungible - the consumer pays again in the end. And if there are REAL victims of the pollution they are not helped at all by the tax - except by the taxes we pay now for Medicaid and Medicare.
Yeah more tax - thats the ticket.

Everybody:

Where did this idea arise that this post is about a tax on carbon dioxide? I never said any such thing. A "carbon tax" could also refer, e.g., to carbon monoxide and hydrocarbons... but this post is not even about a "carbon tax."

It is about how best to discourage negative externalities... all of them. I hope you all don't argue that negative externalities don't exist!

I have an entire category called "Globaloney" in which I argue -- repeatedly -- that the evidence for putative anthropogenic climate change is thin to nil. Why would you leap to the conclusion that this post is some secret way of arguing in favor of taxing carbon dioxide?

"Sit down, take a stress pill, and let's talk this out, Dave...!"

Hal:

No, it does not affect either the efficacy of or the argument for a Pigouvian tax what the government does with the money:

• The efficacy is primarily in the tax's imposition: its mere existence discourages the bad behavior and encourages the good;
• The argument for it is simply that, since all government spending must ultimately be paid for by taxes (where even a deficit is considered a long-term tax on capital), it is better to raise that money via a tax that is less harmful than one that is more harmful.

I do not necessarily support Pigouvian taxes over cap-and-trade systems, but the arguments for and against are not affected by what use the government makes of the revenue raised.

Septagon:

I have bad gut reaction to this concept of externalities. It sounds like another contrivance to justify greater governmental control over our lives. Who gets to determine what are pollutants? Who get to decide what the tax levy is? Who gets to decide the market limits? Do you expect government to act in the best interest of its constituents when answering question such as these. I think not.

Externalities exist in many transactions, and they're not just pollution -- and they're not always negative, either.

For example, if a bus company contracts with a city to provide bus service, and if it provides free bus service for handicapped people, then serving those people would be a positive externality: they're outside the transaction (they're not "customers" of the bus company, since they ride free), but they're affected by it in a positive way.

If a home owner sells his house to a drug dealer who turns it into a crack house, that drags down the property values of every other home on the block and perhaps in the surrounding blocks as well. That is a negative externality of the sale.

Similarly, if I buy a dilapidated house and hire contractors to paint, fix the plumbing and electrical wiring, and landscape, then I resell the house for a profit, that raises the value of all the other nearby properties, which is a positive externality.

In the case of pollution, I understand your distrust: but as a practical matter, if you refuse to do anything at all about it, the choice will be taken from your hands, as the people affected will rise up and resolve the problem their own way... and you probably won't like that solution.

So it behooves you to find the best possible solution given the constraints.

Saying that no factory is allowed to release any emissions at all that could affect anyone else is not the best possible solution -- since the only way to fulfill that stricture would be to end all industrialization in this country... which itself would have some pretty serious negative externalities!

Gbear:

And if there are REAL victims of the pollution they are not helped at all by the tax - except by the taxes we pay now for Medicaid and Medicare.

Yeah more tax - thats the ticket.

Gbear, the idea of Pigouvian taxes is to substitute them for environmental regulations.

In your own comment, you rightly rejected using the courts and using massive regulations (superfunds) to resolve the problem... so what is your solution?

In the real world, there are no "solutions," only tradeoffs. A good deal is one where the tradeoff is less bad than the original problem; a bad deal is the opposite. The best deal is the one requiring the least-bad tradeoff.

In this case, I believe environmental regulations are far more destructive -- not only of particular businesses but of the market itself -- than would be either a cap and trade system or a Pigouvian tax: thus, shifting to either of the latter would be an improvement over what we have now.

Dafydd

Dafydd,

Thank you for the examples of what you call externalities. To me they sound like Adam Smith’s invisible hand or FA Hayek’s feedback loops in the extended market order. This makes it a natural part of the capitalist free market system, not some government scheme.

A bus company can choose to provide free service to a particular groups or individuals but they are still customers. Free and terrible service or free and inconvenient service still has to compete with higher priced great and convenient service. This is very much an economic decision for the company as well as the rider and the market will determine whether it is worth it.

Price is the metric by which this market order feedback is indicated. So people who see their property values fall due to a crack house in their neighborhood can now make new decisions based on this information. This pertains equally to people who see their property value rise due to reinvestment and they can now make new decisions based on this information. This is how the extended market order functions. This so-called externality is a natural part of the free market system if it is allowed to function with out interference from government.

The grand failed experiment of the twentieth century proved that beyond any doubt. Communism and socialism are both bad for the environment. Eastern Europe and Russia are ecological nightmares because government is the only true externality to the extended market order. Even in the USA, the government is the worst polluter in this country. Why? They are a monopoly that does not have to worry about customers or competition. They have no accountability or profit motive to drive efficiency and improvement.

To deal with “negative externalities”, I would say let the market function as it should by getting government out of the way. The natural feedback loops in the free market capitalist system will continue to make the environment cleaner despite government intrusion as it has throughout the twentieth century. People, guided by their own enlightened self-interest, are better stewards of the environment than government doing it for the “greater good”. For the baker does not bake, the brewer does not brew, the butcher does not chop out of the goodness of their heart. They do it because they want your patronage. So give me what I want and I will give you what you want and that way we will all make the world a better place.

Septagon:

I think you're missing the point. Pigou's research was not intended to disprove capitalism or promote socialism; it's part of the ongoing technical research into how economies work (or why they don't work, as with the Soviet Union). I believe he was much more of a "technical economist" than a "grand unified theory economist." His mentor, Alfred Marshall, is primarily remembered for introducing mathematical rigor (but not rigor mortis!) to economics.

Since economics is in fact a science, ideas are constantly tested, found wanting, improved, and tested anew... just as with biology, physics, and anthropology. Not every economist is either a good guy (promoting capitalism) or a bad guy (pushing collectivism); many just work on technical aspects of the field.

Pigou is not a threat to capitalism, nor is his best-known work, the Economics of Welfare, an argument for more government welfare. (The "welfare" in the title is a technical economics term.)

But Pigou did look at one area where the market does not function well: there is no incentive inherent in a free market for any of the parties to an agreement to do anything about negative externalities -- since by definition, they do not affect anyone who is a party to the agreement.

Thus, if a factory is pouring cyanide into the drinking water downstream, the market will not take care of this problem: the only way it gets resolved is by some force external to the market -- whether that is a civil or criminal court system, a regulatory system, or a tax.

(The idea that people in Upriverton will cease buying from the factory because its runoff may be poisoning people in Downriverville is dubious, to say the least; remember NIMBYism.)

Just as the market cannot function without a fair and honest judicial system (which is not a market function) and cannot function without a national-defense system (which is also external to the market), so too it cannot function without some external mechanism to resolve the problem of negative externalities.

Capitalism is a science, not a religion.

People, guided by their own enlightened self-interest, are better stewards of the environment than government doing it for the "greater good". For the baker does not bake, the brewer does not brew, the butcher does not chop out of the goodness of their heart [sic]. They do it because they want your patronage. So give me what I want and I will give you what you want and that way we will all make the world a better place.

Septagon, are you a college student?

Dafydd

Dafydd,

We agree that government is external to the market. We also agree that government is also required to create, maintain and sustain the framework by which the market operates. I also agree with Thomas Jefferson that the purpose of government is to secure life, liberty, and the pursuit of happiness as per the Declaration of Independence. Given government’s track record, it is an organization ill-equipped to determine what should be subject Pigouvian taxes, how much those taxes should be, or how these should implemented, or what should be done with the resultant revenue. Why do you want to empower government with such power? The same goes for government creating markets. That would be an oxymoron.

I also agree that the Upriverton factory dumping cyanide into the river is not an economic market issue. They are violating the individual rights of the Downriverton residence. Since government is supposed to protect the rights of its subjects, it should bring its full force to bear against such a business. Union Carbide and Bhopal India comes to mind as a prime example. I do not think this could be considered a failure of the market but the illegitimate presumption on the part of the Upriverton factory that they have the right to poison people downstream. Committing homicide is not a good business model. This is something government is much better equipped to handle.

So if government stops trying to re-engineer society and concentrates on protecting individual rights and private property these so called negative externalities would be dealt with. While I was once a college student I am now just a student of life. Economics is the study of how limited resources with multiple uses get allocated. It would sure make a strange religion. To whom would you pray? The almighty dollar, eh? I guess you did not catch my multiple allusions to Adam Smith.

Septagon:

Given government’s track record, it is an organization ill-equipped to determine what should be subject Pigouvian taxes, how much those taxes should be, or how these should implemented, or what should be done with the resultant revenue. Why do you want to empower government with such power?

I'm not empowering them; I recognize the fact that they already have the power to impose taxes. In fact, I recognize all of the following -- as do you, if you really stop to think about it:

1. The government has the physical power to impose taxes;
2. Government spends wealth;
3. Government does not create wealth;
4. Thus government can only spend wealth by expropriating it from its creators... that is, by taxes;
5. Thus, having the need for taxes, and having the physical power to levy taxes, I think we both agree that government will, in fact, continue levying those taxes;
6. Therefore, the only questions are "how much?" and "levy how?"

Pigouvian economics only attempts to answer the second question, and it's orthogonal to the first: whether you tax a lot or a little, you can still choose exactly what activity will be taxed.

Pigouvians believe that, regardless of the level of taxation, it's better to tax activities which negatively affect society than those which positively affect it: the axiom here is that what you tax, you make more expensive and thus get less of... therefore, you don't want to tax good things, like real estate, savings, and especially not income or capital gains (wealth creation).

Remember also that Pigouvians see Pigouvian taxes as a substitute for significantly more destructive coercive regulation. For example, if society decides that second-hand smoke is an annoying infringement on the rights of nonsmokers (and might possibly have adverse health effects, though that's less obvious), and that we should reduce the level of public smoking, which of the following is least violative of liberty:

• Banning smoking in all public places;
• Putting a tax on cigarettes.

I suspect that most smokers would prefer the tax. (Actually, they would prefer nothing at all; but you must balance rights: whether smokers like it or not, it's reasonable to assert that their right to smoke cannot trump other people's right not to smoke.)

The Pigouvian would argue in favor of the latter instead of the former; the fact that government often does both is not an argument against Pigouvianism -- it's an argument for strengthening the Pigouvian impulse at the expense of the regulatory impulse.

I also agree that the Upriverton factory dumping cyanide into the river is not an economic market issue. They are violating the individual rights of the Downriverton residence. Since government is supposed to protect the rights of its subjects, it should bring its full force to bear against such a business. Union Carbide and Bhopal India comes to mind as a prime example. I do not think this could be considered a failure of the market but the illegitimate presumption on the part of the Upriverton factory that they have the right to poison people downstream.

I see I was right, Septagon: you still think I'm arguing that markets are failures and we should move to a socialist model.

I assure you, you are in error. I never said that the Upriverton scenario was "a failure of the market," nor do I believe it. Here is what I actually wrote:

But Pigou did look at one area where the market does not function well: there is no incentive inherent in a free market for any of the parties to an agreement to do anything about negative externalities -- since by definition, they do not affect anyone who is a party to the agreement.

Saying the market does not "function well" in some area is not the same as saying it's a "market failure" -- not unless you believe that the concept of the free market is intended to resolve every imaginable problem, from forest fires to a smallpox epidemic.

The market is the most efficient engine for matching consumers to producers, thus the most efficient engine for generating wealth. It is also the most just system ever devised for "economic triage," for distributing scarce resources fairly: simply put, those who do the best job producing get the lion's share of the resources... "from each according to his ability to himself."

It is the only economic system that actually takes advantage of human nature, rather than trying to surmount it. Thus, it's the only one that works.

But the market model does not control every aspect of society. It doesn't work for a justice system, for example: we think it wrong that a rich guy can buy his way out of trouble, while a poor guy is much more likely to be wrongly convicted.

Similarly, not even David "Son o'Milton" Friedman was willing to argue that we could defend the country with a privately funded army. This doesn't mean that national security constitutes a "market failure;" it means that the market model was never intended to cover national security... no free-market economist, from Smith himself, to the Austrian school (Mises, Hayek, Hazlitt, etc), to the Chicago school (Milton Friedman, et al), nor even radicals like Thomas Jefferson has ever argued that armies should be funded or governed via libertarian free-market methods: we have citizen soldiers; but once under arms, they are regulated by an absolute despotism!

And by the same token, by definition, the market was never intended to resolve problems caused to people who are not involved in the transaction... "negative externalities."

Whatever method used to resolve that problem, it must of necessity be external to the market model. That is all I'm saying. Whether it's resolved via Pigouvian taxes, by regulation, or by the courts, it's external to the market model.

Thus, for those of us who believe the market model is a very good one, it makes sense to pick a method of resolving negative externalities that most closely resembles a market model.

That is what the Pigouvians are trying to do, however successfully or unsuccessfully.

Dafydd

Dafydd,

I would like to thank you for taking the time to discuss this issue with me. We have been able to refine the raw ore in the crucible to separate the refined metal from the dross.

We should at all times and all places limit the power of government. While I agree with you that government will and does levy taxes; taxes should only be levied for the purpose of raising revenue. I would also agree that the raising of revenue should be done with the least harm possible, but raising taxes with good intensions will only lead down the road to serfdom. You said it yourself that Pigouvians believe it is better to tax activities that negatively impact society. Who are they to determine what negatively impacts the individual?

In other words, we the anointed by our higher intellect and reason will make certain items and activities more expensive because we have determined they are bad for you. Since you, the unclean masses, are incapable of running your affairs properly we will tell you how. We, the Pigouvians, will reshape society as we see fit. Our civilization has become too complex and too messy to allow it to evolve without our conscious direction and guidance. Dafydd, this is the fatal conceit you are asking us to consider.

Government is instituted among men to protect individual rights and private property. This is necessary because men are not angels, but since we are governed not by angels either, government must have limits. While Pigouvian pollution control might sound good on paper, its implementation by government would look like a cross between the IRS and the EPA. To justify it bureaucratic existence, its goal would be to maximize revenue not minimize pollution. You would merely trade one regime of regulatory control and intrusion with another.

Since you admit that the market actually does handle negative externalities, let us figure out together, why markets handle these problems poorly and find ways to get the market to handle them better. A negative externality of a single transaction does not necessarily make it external to the entire extended market order. The market is also the most efficient system for collecting, analyzing, and utilizing information. It will outperform any committee of Pigouvians attempting to preside over schedule of pollution taxes.

Why? Because we demand it! Companies will want to meet that demand because they want to please their customers. Companies ignore their customers’ wants and desires at their own peril. Competition will drive companies to innovate and improve delivering goods and services better, faster, cheaper, and cleaner. No government coercion necessary for this to occur. The improvement of the US environment throughout the twentieth century despite government intrusion proves this.

As I have repeatedly stated, government does have a legitimate purpose, which is the protection of individual rights and private property. I have never suggest or implied that the market is the panacea for all problems or that the market perform functions that clearly fall under the purview of government i.e. National Defense, police, fire, adjudication, etc… I have consistently stated that government should be limited to these functions, and any expansion of the powers of government, no matter how good the intentions, will lead ultimately to tyranny.

Septagon:

While I agree with you that government will and does levy taxes; taxes should only be levied for the purpose of raising revenue. I would also agree that the raising of revenue should be done with the least harm possible, but raising taxes with good intensions will only lead down the road to serfdom. You said it yourself that Pigouvians believe it is better to tax activities that negatively impact society. Who are they to determine what negatively impacts the individual?

Congress makes that decision every single time it enacts a tax, Septagon.

Your argument is ultimately that of a liberal: I say 'since taxation is inevitable, let's try to minimize its harm.'

And you say, 'I don't trust government to do that properly.'

I say, 'it doesn't matter whether you trust them or not: they're the ones making the decision.'

And you say, 'free to be you and me! the machinery of freedom! atlas shrugged!'

We're not getting anywhere, and I cannot spend the rest of my life writing comments to my own posts. This is my last attempt to explain what I mean...

Whenever Congress enacts a tax (and the president signs it), some members (or more likely, their tax aides) have chosen what to tax. This is a truism.

Thus, given that one must always make the decision what to tax -- and that we know which body will make that decision -- it behooves us to ask that Congress decide what activity to tax based upon the "least harm" standard.

It is completely irrelevant whether we do or do not "trust government" to make that decision properly; there is no alternative to Congress making it, only to how they choose to decide.

You are still stuck on the impossible: no matter what you say or do, Congress will decide what to levy taxes on; we cannot change that. Since they must inevitably levy taxes, the best we can do is get them to levy those (inevitable) taxes on activities that harm the economy or society, rather than on those that benefit it.

Of course Congress will have to decide which activities "harm the economy or society;" but that, too, is inevitable: the best we can do is get them to use that standard when they make the decision -- as opposed to simply grabbing for the biggest piggy-bank they can see.

In other words, we the anointed by our higher intellect and reason will make certain items and activities more expensive because we have determined they are bad for you.

Yes! Exactly. But you must also add one more clause:

We, the anointed by our higher intellect and reason, who plan to raise $100 billion dollars anyway, will levy that tax on certain items and activities, making them more expensive, because we have determined they are bad for you -- instead of levying it on other items and activities that we have determined are good for you.

As the president said anent the late election, it's a choice -- not a referendum. We're not debating whether government is smart; we're not even debating whether they should levy taxes. Only one question is before this body: given the inevitability of taxes, and given that they have already decided how much to raise (however high or low that is), then how should Congress decide what activities to tax?

This is the part I don't think you get: you seem to believe that the alternative to a Pigouvian tax is no tax at all; but that is false: the alternative to a Pigouvian tax is a non-Pigouvian tax on a different set of items and activities, a tax which causes greater distortion and harm to the market.

Congress will still tax, and at the same level: but when they tax, say, income and capital gains, they ensure there will be pressure to curtail investment and the generation of income, which harms the economy.

When Congress taxes the assessed value of real property, they discourage the owner from adding value to his property: in addition to paying for the swimming pool, he has to pay, in perpetuity, a bigger tax on his home -- even though the actual size of the lot hasn't changed.

It's not always possible for Congress to find something to tax that clearly harms society; but it is always possible to attempt to find taxable activities which are the least valuable of all taxable things that still add up to whatever total level of taxation Congress has decided to impose.

Since you, the unclean masses, are incapable of running your affairs properly we will tell you how. We, the Pigouvians, will reshape society as we see fit. Our civilization has become too complex and too messy to allow it to evolve without our conscious direction and guidance. Dafydd, this is the fatal conceit you are asking us to consider.

Look, you can sling around libertarian book titles until the cows come home to roost; but the fact remains that somebody will "run your affairs," as far as taxation goes; somebody will supply the "conscious direction and guidance" in the form of levying taxes; and that somebody -- Congress -- will have to decide what activities to tax; taxes cannot be applied at random, for heaven's sake.

You cannot get around this: somebody must choose, and he must have standards before him to guide his choice. Even if Congress picked somebody else to decide how to levy taxes -- a blue-ribbon panel of people who have written monographs on the Road to Serfdom and the Fatal Conceit -- then that panel will have to make the exact same decisions!

You would merely trade one regime of regulatory control and intrusion with another.

Yes, of course; that is the nature of life... there are no solutions, only trade-offs: you replace a very bad "regime of regulatory control" with a better.

Since you admit that the market actually does handle negative externalities....

You'll not get anywhere by making up concessions that never occurred: I admitted no such thing and in fact said the exact opposite.

From here, your post degenerates into a series of quasi-religious hosannahs for the free market. While I share your sentiment, I am more hard-headed about such things: I do not assert that the model of the free market "solves" every imaginable conundrum humans face without any negative trade-offs.

Finally, I note that in all your thousands of words on this subject, you have not once offered an alternative to Pigouvian taxes... except to maintain the regulatory status quo, as if that did not impinge even more on the market.

Dafydd

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