In almost every economics textbook one will find a discussion of market failure. The conversation will usually go something like this: Markets are great, but they sometimes fail. If transaction costs are low, no government action is needed. But if transaction costs are high, government can (and should) step in to correct the failure. One of the most common methods advocated for correcting market failure is that of the British economist Arthur C. Pigou:Taxes.
A Pigouvian tax is a tax designed to correct a specific market failure: negative externalities. A negative externality is a situation in which costs are imposed on a third party outside the transaction. Since they are not part of the initial transaction, the monetary price that occurs in the market does not fully reflect their costs. Thus, a tax can be applied that increases the market price, reduces the quantity in the market, compensates for the imposed costs, and the market failure is removed. Negative externalities seem to be ubiquitous in society (pollution, bad odors, passive smoking, etc.). Moreover, transaction costs are high (imagine if a power plant had to negotiate with every person affected by its smog!). Therefore, many economists consider the need for Pigouvian taxes to be self-evident.
I am, however, in a very small minority. While I understand the logic of Pigouvian taxes, I reject them as a practical solution; I do not think they are the best, or even the twelfth, solution to market failures. Economics of public choices This gives us a major reason to be skeptical of government-imposed market failures, even so-called “market-based” interventions like Pigouvian taxes or cap-and-trade. The assumption underlying Pigouvian taxes (or any government intervention in the economy) is that government is a benevolent dictator; it seeks to do what is right and can do so unilaterally. But Public Choice teaches us that we must take into account the world as it really is as opposed to an idealized alternative state.
In the real world, government is neither benevolent nor dictatorial. Government agents are not benevolent, but they are not generally evil either. Like all of us, they are interested in their own interests. They want to keep their jobs, they want to do a good job, they want to go home to their families at the end of the day, and so on. They have hopes, dreams, and desires. And they act based on their motivations and goals, which are likely different from those of most other people. What motivation, then, do they have to allocate the “right tax” to solve an externality, or even to gather all the information needed to allocate it correctly?
In the real world, government (at least in the United States) is not a dictatorship. It is made up of many functional parts. Many policy decisions are made in committee or determined by a vote of Congress. Policymakers and decision makers must balance many tasks, a lot different issues. As a result, politics most often deviates from a theoretical ideal and tends more towards being politically correct. (By this I mean that politics is correct for some policy (objective rather than a non-political objective.)
In a recent article, Pierre Lemieux highlights an example of politically correct policy: Tariffs on electric vehicles made in China (EV). We are often told that global warming is a big problem that warrants big government intervention. Indeed, this is the justification for many government subsidies for green energy (a reverse Pigouvian tax) and a carbon tax. From this perspective, tariffs on EVs made in China make no sense. If there is a negative externality and there is a product on the market that can reduce that externality, then why ban it? The answer: because those cars weren’t politically correct. They solved the market problem, but not in the way that was politically desired. So the administration, seeking to protect its electoral base and achieve its own goals of staying elected, chose to take a step that makes the externality worse rather than better. All this in the name of the fight against externality.
Why am I against a carbon tax? Because I see no reason why it should not be subject to such political correctness. Even if it were possible to calculate the necessary tax accurately and at no cost, why should we believe that it would not be implemented and designed in a way that favors certain groups and achieves certain goals? policy objectives rather than economic ones?
Jon Murphy is an assistant professor of economics at Nicholls State University.
