Thursday, March 15, 2007

Free marketer against Pigou

David Friedman joins the No Pigou Club: In a new post today, he hits on two key reasons to oppose energy tax--nobody can know what the right tax level should be, and he has no confidence the revenue will be used to offset other taxes.


Blogger David Friedman said...

You describe me as joining the no Pigou club. You also write:

"In the view of the NoPigou Club, the Pigou approach is just another form of central planning dressed up in free market terminology."

That isn't my view. I think Pigou offered an ingenious way of dealing with externalities, often superior to the alternative command and control approach. And in some contexts it's a good idea--consider tort law, for instance, which is essentially a version of Pigouvian taxes.

One problem with the idea is that it is in part wrong, for reasons pointed out by Coase; one consequence is that under some circumstances Pigouvian taxes make the problem worse rather than better. Interested readers may want to look at the article of mine webbed at:

The other problem is that, where the Pigouvian solution is implemented by a government, it suffers from the usual public choice difficulties; it may not be in the interest of the government to do the right thing. But that is also a problem, arguably a worse problem, for the command and control alternative.

For an example of the Pigouvian approach in a non-governmental context, take a look at the chapter of my _Price Theory_ webbed at:

4:36 PM  
Blogger Brian said...

I note that last weeks report on Kyoto that John Baird gave to the senate "The Cost of Bill C-288", mentions:

A)that tax relief won't be 100%


B)"Revenue received from a broad carbon tax could be recycled back through the economy through changes in other tax rates, although at the same time it would be essential to ensure that the government's overall fiscal situation be kept whole in order to avoid returning to deficit."

As has been mentioned before, once you start decreasing energy usage, carbon tax will go up to offset the government losses (or keep the fiscal situation whole).

4:52 PM  
Anonymous Sukrit said...

I don't understand... so is David Friedman part of the Pigou Club or not?

4:59 PM  
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