Saturday, September 20, 2008

Taking Aim at the Pigou Club

In a recent issue of Regulation magazine, John Nye takes the Pigouvian tax to task. His argument is basically two-fold. First, economists need to measure both the optimal level of externality and the actual externality. If Coasean bargains are taking place (to any extent), then measuring only the perceived externality will lead to too little of the externality. Second, no studies account for the myriad of other factors that either encourage or discourage externalities. For example, the government may increase pollution through subsidizing rural neighborhoods or discourage it through high taxes on automobile related purchases. Until all of these factors are accounted for, then even a perfectly accurate measurement of the Pigouvian Externality wouldn't tell us whether we have too little or too much of the externality.

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