Even Small Costs Must be Justified (I Presume)

by Don Boudreaux on May 25, 2004

in The Economy

Gregg Easterbrook, moved by a spirit similar to the one that inspires Charles Krauthammer, calls for a 50¢-per-gallon hike in the federal tax on gasoline. He argues, rightly, that such a tax will generate some benefits, including fewer highway deaths (as drivers switch from SUVs to smaller cars), fewer polluting emissions, and reduced political entanglements with oil sheiks.

What’s striking about Easterbrook’s case is the blitheness with which he presumes that these benefits would justify the costs of the tax hike. Such costs include reduced satisfaction of drivers who would prefer to drive SUVs (but who find doing so prohibitively expensive given the steep tax) and higher costs to motorists of fueling up to drive from point A to B. (Note that among the costs of the tax is not a heavier tax burden. Easterbrook proposes, and we can play along, that other taxes – say, income taxes – be reduced so that the higher gasoline tax is revenue neutral.)

The fact that the New York Times published Easterbrook’s op-ed is evidence that his argument strikes many people as sensible and sound. But suppose instead that Easterbrook had proposed a per-gallon tax hike of $50,000. Would the NY Times have published that proposal? No – at least, not unless Easterbrook had presented a sound argument, backed by evidence, that the benefits from such a tax hike might plausibly be greater than the obvious substantial costs.

The benefits of a $50,000-per-gallon tax hike would undoubtedly exceed those of tax hike of 50¢-per-gallon. The reduction in highway deaths, the reduction in polluting emissions, and the speed with which the U.S. government disentangles itself politically from oil sheiks would all be much greater with a tax hike of $50,000 per gallon than with a tax hike of 50¢ per gallon. But the costs of a $50,000-per-gallon tax hike would also be enormous – so enormous that everyone immediately sees that the costs of such a tax hike would swamp the benefits. Easterbrook could not get away with merely presuming that the cost-benefit calculation runs in favor of the colossal tax increase.

But when the proposed tax increase is only 50¢ per gallon, Easterbrook gets away with his presumption. Why?

My point is not that the substance of Easterbrook’s presumption is mistaken. It could be correct. My point is that too many people too gullibly assume that incurring modest costs is worthwhile if doing so promises any benefits whatsoever. That is, too many people are unaware that a policy proposal that burdens us with only modest cost is still not worthwhile if the size of its benefits is more modest still.

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