Wednesday, October 18, 2006

Pigou joins NoPigou club!

Since Greg Mankiw has no problem unilaterally enrolling people in his campaign to raise gasoline taxes—the Pigou Club—I hereby induct a new member into the NoPigou Club—Arthur C. Pigou. Pigou is widely credited with creating the concept of externalities, even though he never used the word himself. The standard statement on Pigou is that he argued that the existence of externalities was sufficient justification for government intervention.

Well, maybe he did at one point. But in 1954, five years before his death, Pigou seemed to have changed his mind. Here’s the full citation on the subject.
When people decide to spend their money in certain ways it sometimes happens that their spending yields uncovenanted benefits or inflicts uncovenanted damage on other people whose gains or losses do not enter into the calculations of the spenders. There are many examples of this. The social costs involved in the supply of alcoholic drinks includes the provision of police to control the effects of excess, but these costs do not enter into the price that the purchasers of such drinks have to pay for them. Nor does the damage done to people living near smoking factories and the extra washing bills they have to pay enter into the price of the factory’s products. If they did, as, with strict social accounting, they ought to do, the price of those products would be higher, less of them would be demanded and less resources devoted to making them. On the other hand, when a good landlord protects the amenities of the neighbourhood and erects a beautiful instead of an ugly house there is a benefit to others for which he gets no payment. These gaps, positive and negative, between private and public costs were not much in people’s minds until fairly recently. Now everybody understands about them. It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of them could usefully interfere with individual freedom of choice. Moreover, even though economist were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. “Fancy” finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.
From A. C. Pigou, “Some Aspects of the Welfare State,” Diogenes 7:1-11 (Summer 1954), p. 10


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