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To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Tuesday, February 22, 2005

Fred Foldvary on Green Taxes

Via Independent Country:

Geo-capitalist Fred Foldvary argues that the best way to fight global warming is via Pigouvian taxation of externalities like pollution and greenhouse gas emissions--and not through centralized controls imposed by the regulatory state.
The most efficient way to reduce pollution has been well known in economics for 80 years. The economist Arthur Pigou showed how when there is a negative external effect such as pollution, the buyer is not paying the full social cost of the good. In effect, the user is subsidized. To eliminate the subsidy and make him pay the social cost, there needs to be a pollution charge on the sale of the good, ideally equal to the social cost of the pollution contributed by that item.
I'll go him one further on it. In most cases (stipulating that some cases exist), government action is not needed to prevent externalities; rather, externalities are created by government action. In fact, Oppenheimer's theory of the "political means" is just another way of saying that government is a mechanism for creating externalities: the state transfers the costs and risks of certain kinds of economic activity from the actors themselves to others, so that some are enabled to live at others' expense.

The solution, in such cases, is simply to end the existing state subsidies or privileges, so that the economic actor fully internalizes the negative consequences of his action through the price mechanism.

Now, if one accepts (as I am inclined to) a semi-Geoist argument that some particularly scarce forms of natural resources (like mines and forests) should be treated as a social commons, with community collection of rent, the rent paid to local communities may itself be a legitimate way of internalizing costs in price.
....the USA could implement the Kyoto goals by shifting public revenue to pollution and land rent. But the US chiefs have rejected this. The coal and oil industry chiefs in the US have great political clout, and will not allow a tax shift that will reduce their economic dominance. The public is too ignorant and apathetic to demand the efficient solution to pollution.
Or it could simply cease to subsidize the consumption of energy and transportation services, start running the interstates and airports entirely on cost-based user fees, and eliminate the use of eminent domain to expand transportation infrastructure. Of course, charging rent for access to coal and oil reserves might be part of such a scheme.
The economic reality is that in the long run, there need not be any economic cost to reducing pollution. The political reality is that the governing chiefs do not want to enact pollution-reducing charges because the chiefs of the polluting industries have huge political clout.
Exactly! One of the central functions of the regulatory state, contrary to "progressive" conventional wisdom, has been to preempt the preexisting law of public and private nuisances. Federal regulatory controls on pollution and other nuisances supercede, not only more stringent state laws, but the power of state and local juries to impose civil damages on corporate malfeasors. Hence the popularity of preemption provisions in new federal regulatory legislation, along with legislation like the bill currently under consideration to remove class action suits to the federal court system. Such measures are especially popular among those "Tenth Amendment" Republicans.

2 Comments:

Anonymous Anonymous said...

How would you respond to David Friedman's critique of Pigouvian taxes in Chapter 4 of _Law's Order_ (available online from http://www.daviddfriedman.com)? The core of his argument is: the Coase Theorem implies that the underlying problem is really a transaction costs problem, and a tax is unlikely to address this problem; indeed it may often produce inefficient results by shifting pollution liability from lower-cost to higher-cost avoiders. So in general common-law nuisance rules are a better method of pollution control.

Now global warming-related emissions, the case Foldvary treats, are probably an exception to this rule: the resource involved is irreducibly common and presents a huge public good problem, and there is no way for the victims of the pollution to avoid its effects. But many other suggested applications of Pigouvian taxes are not so clear-cut.

Then, too, there's the public-choice problem. The rate of Pigouvian tax has to be set somehow. Who'se going to do it, and why should we expect that they will set the rate at (or about) the efficient level, rather than at the level that suits their political interests? Note that this objection also applies to Georgist proposals for taxation of land rents; I'm not at all convinced that one can determine in a sufficiently disinterested manner what the rent value of a piece of land actually is.

--Nick Weininger

February 24, 2005 8:08 AM  
Blogger Kevin Carson said...

Thanks for the thoughtful comments.

I'll check out the Friedman reference--although with my gentleman's C n algebra, I don't have the mathematical apparatus for digging very deep into 20th century neoclassical stuff. The main criticism of Pigouvian taxes I'm aware of is that of James Buchanan: that it ignores psychic costs and benefits that aren't reflected in money prices.

As I said in the post, I prefer eliminating existing government interventions that distort the market and prevent costs being internalized, before correcting the distortions with a new layer of government activity. And like you, I certainly prefer civil damages to taxes as a means of internalizing cost.

The problem you mention with Geoist solutions is a valid one. The accuracy of their assessments is related to Mises' rational calculation problem, I think: the Geoist assessor relies indirectly on market prices as an information source in the same way as a state planner in a planned economy. The closer he is to assessments by exchange-price in an actual market, the more accurate his assessment of a piece of property is likely to be. He can probably get a pretty valid assessment of a piece of ordinary residential or commercial property in an area where similar plots are bought and sold frequently.

But I prefer Tuckerite occupancy-and-use for such parcels rather than the Geoist approach of rent collection. And since there won't be a normal market for the kinds of resources (forest and mines) which I prefer to treat as commons, the information problem crops up.

It's a problem that certainly bears thinking about, and IMO there's no solution that doesn't have drawbacks. I reject absentee ownership in principle; ordinary Tuckerite occupancy-ownership of especially scarce resources seems to lead to unacceptable levels of economic rent; and regulation of access as a "social commons" presents the informational problems we discussed above. Bummer.

February 24, 2005 9:04 AM  

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