When Pigous Don't Have Wings

by Russ Roberts on January 22, 2007

in Politics

My podcast with Greg Mankiw is now up at EconTalk. (This replaces the interview with John Bogle, the inventor of indexed mutual funds, which alas, has been postponed. Meanwhile, for a taste of the economics of indexed mutual funds, go here.)

Greg and I talk about Keynes, and macro and the multiplier and deficits and entitlement programs. We also spend a lot of time talking about the virtues and drawbacks of increased taxes on gasoline.

Greg calls those who support the higher taxes on gasoline, members of the Pigou Club, in honor of A.C. Pigou, the British economist who pioneered the uses of taxes and subsidies to correct externalities—what are sometimes called spillover effects. If I put garbage into the air or into a lake or stream, some or much of the cost is going to be external to me—it will be imposed on others. Therefore, goes the standard story, there will be  more pollution than would occur if the costs were  all imposed on me.  To  correct my incentives, Pigou argued, impose a tax on me equal to the extra costs I impose on others. 

Drivers impose externalities on others in the form of air pollution, traffic and possibly global warming. Because driving is too cheap, goes the argument we do too much of it. So to align the incentives correctly, says the Pigovian, raise the tax on gasoline. In his manifesto, Greg lists additional reasons beyond pollution and global warming in making the case.

I have no problem with the theory behind this general argument. Yet I still can’t join the Pigou Club. I make some of the counter-arguments in the podcast—they essentially have to do with how such a proposal is implemented when the political process gets a hold of it. Greg’s answer is that yes, there are going to be political complications, but if we let political complications stand in the way of good economic policy, we may as well fold up our tent and go home. There are always going to be political complications. So if economists want good policies, they should advocate good policies even if in practice, they may not always turn out ideally.

Who’s right? What should economists advocate in these situations? I’ve been thinking about this a lot ever since I interviewed Richard Thaler. Shouldn’t we support having government encourage (not force) people to make better decisions if without that encouragement people will make bad decisions? My answer is no. I don’t expect pigs to fly. Why should I expect government to be good at helping people make good decisions?

The standard argument against government intervention to correct market failures is that you have to look at government failure, too. It would be naive to argue that we shouldn’t worry about pollution because people will feel guilty polluting and that will discourage pollution. Similarly, it strikes me as naive to encourage government to solve the pollution problem via a gasoline tax if you know that the level of the tax will be set wrong and that the money will be badly spent. On the podcast, Greg counters this point by asking whether I’d favor a tax increase coupled with a tax cut or a tax increase coupled with eliminating CAFE standards, say. Probably, I answer, but that strategic advocacy seems very different to me than economists coming out for a gas tax on efficiency grounds.

We didn’t get to discuss this in the podcast, but I assume CAFE standards exist not because politicians are stupid but because politicians are smart. It strikes me as rather strange to advocate replacing CAFE standards with a gas tax. It’s certainly OK to explain why one tax is a more effective way of reducing gasoline consumption. But I wouldn’t hold my breath waiting for it to happen or spend a lot of effort trying to make it happen. Politicians prefer complex policies that redistribute income to their friends and encourage friends and enemies to lobby for changes in the law, relative to decentralized solutions where it’s hard to claim credit for the benefits.

That’s the Stigler in me. The Friedman in me says we should push for changes like that as well as anything that makes government smaller. But advocating a gas tax simply because driving produces externalities is a move in the wrong direction.

But listen to Greg on the podcast. He gets plenty of air time to make his case. Maybe he’ll convince you.

POSTSCRIPT: The theoretical counterpoint to Pigou is Coase, who we do discuss in passing on the podcast. Here’s my attempt to use Coase to explain why some externalities should be ignored.

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{ 41 comments }

Steven Plunk January 22, 2007 at 11:09 am

Why must we look at driving as a personal luxury rather than as a great productivity tool? If we look only to the external costs we forget the external benefits also derived from the use of automobiles.

The Pigou's are also listing the benefit of energy independence as a reason to raise the tax. That energy independence would limit the cash flowing into countries that oppose US policies around the world. They ignore the comparative advantage of those countries and how that advantage keeps energy costs low for all of the world. They simply want to use economic tools rather than political tools to make changes beneficial to the US.

The mixing of economic goals, political goals, and environmental goals, all under the governments oversight and control seem very, very risky for the consumer.

This doesn't appear to be thought through enough for my support.

Jim January 22, 2007 at 11:49 am

How do you calculate what the tax should be when economists do not agree on what the cost of global warming will be? (E.g., Nordhaus vs. Stern.)

Robert Coté January 22, 2007 at 12:26 pm

I'm afraid that if Prof M counted positive externalities he'd be forced to conclude that gas subsidies were in order. FOAMers* love to cite air pollution and highway deaths but fail to notice the air getting cleaner as dirty inefficent modes are replaced with autos and the massive life savings quick emergency response times generate. Then there's things like police and fire which are orders of magnitude less expensive for being mobile on the roads paid by motorists.

*FOAMers – Forces of Anti-Mobility

Cornelius van Vorst January 22, 2007 at 1:40 pm

"… if we let political complications stand in the way of good economic policy, we may as well fold up our tent and go home. There are always going to be political complications."

Is it "good policy" if it doesn't work?

I thought economists knew better than to ignore the reality of markets. If the incentives of the political market do not change, then by what basis should one expect a government solution to work this time? This is analogous to saying Socialism will work if people would stop being greedy.

Perhaps, instead of pushing a policy he hopes (in the face of experience) will be enacted effectively, Dr. M should work with the givens of the real world.

While we're on the subject, when 90% of the population engages in driving, in what way can automobile polution be considered an externality?

For the 10% that don't drive, they predominately live in cities; cities which function due to the availability of cheaply transported goods. Is the externally imposed cost of polution better or worse than the externally imposed increase cost of goods? How would we know without totally ignoring subjective utililty?

ChristianCB January 22, 2007 at 2:33 pm

I have yet to see an externality that couldn't be sovled with private ownership and property rights.

For example, the roads. The roads are like this…Imagine a website that allowed you to download all the music you wanted for only one payment a month. That would be nice, but it wouldn't work. After a while, the demand on the servers would outpace the ability to pay for, and install, new servers. People would download as much as they could to get the most out of that one payment. The ability to download at any reasonable rate would also be effected (like heavy traffic).

That's the same reason why people "drive to much".

-Chris

Mike Hammock January 22, 2007 at 6:13 pm

On the podcast, Greg counters this point by asking whether I'd favor a tax increase coupled with a tax cut or a tax increase coupled with eliminating CAFE standards, say. Probably, I answer, but that strategic advocacy seems very different to me than economists coming out for a gas tax on efficiency grounds.

There is an efficiency argument for coupling the gas tax with the elimination of CAFE standards and other taxes. CAFE standards and taxes on income result in deadweight losses. A tax on gasoline, by contrast, reduces a negative externality. If we replace CAFE standards and payroll taxes with a gasoline tax, we're getting a double dividend–reducing negative externalities, and reducing the deadweight losses from taxation and command-and-control regulation. Replacing a source of government revenue that creates harm with a source that reduces harm seems like a good deal to me.

Cornelius, just because everyone does something doesn't mean there is no externality associated with the activity. The key to the existence of the externality is that my actions don't completely and only affect me. If everyone., including me, is shooting bullets into the air, chances are good that lots of people will get hit. I'm imposing a negative externality on others. I'm very unlikely to be hit by my own bullet, so I keep shooting. I can't control anyone else's actions, and my bullets are unlikely to hurt me, so I shoot. If we could all agree somehow to stop shooting into the air, we might all be better off–but we can't. That's the nature of the public good/externality problem.

Regarding Coase, his work is important and I teach the Coase Theorem in my environmental economics class, but it's worth keeping in mind its limitations. Pollution, particularly on a national or global level, is probably not a problem that can be solved with bargaining. Transactions costs are simply too high.

I have a lot of sympathy for the Public Choice view that government is unlikely to generate efficient outcomes, yet I'm also uncomfortable with concluding that there should be no environmental regulation of any kind (in fact, the argument suggests that we should have no government at all, and while I have anarcho-capitalist leanings, I'm too worried about market failure to commit). SO2 regulation has been very successful. The U.S. is a lot cleaner than it used to be, for many chemicals, in part because of regulation. Some kind of additional regulation is going to be enacted for CO2; I think it is the duty of economists to ensure that it is of the least harmful sort: Market-based.

Professor Roberts, I cannot help but wonder what, in your opinion, is the proper role of government? Does not your criticism of the efficiency of political outcomes apply to enforcing contracts, providing police services, and national defense, as well as pollution regulation?

Cornelius van Vorst January 22, 2007 at 7:39 pm

"Cornelius, just because everyone does something doesn't mean there is no externality associated with the activity. "

Of course it does, precisely because in such a situation the cost of pollution is borne by the polluters. To use your analogy, if we all want to shoot bullets in the air, the cost of getting hit is not modified by whose gun it originated.

In fact you allude to the real issue when you say, "if we could all agree somehow…" This is a coordination issue which results from the commons problem, not one of externalities.

Mike Hammock January 22, 2007 at 7:54 pm

The commons problem is the externality problem, which is also the public goods problem, and they're all coordination problems.

The air is a commons; my actions that pollute it have a tiny–close to zero–effect on me. It also has an effect on lots of other people. The same goes for everyone else, so as a result, we get an inefficiently large amount of pollution. This is the tragedy of the commons. It's also a negative externality.

Or we can rephrase it as a public good. Clean air is nonrival and nonexcludeable in consumption. We each have insufficient incentive to contribute to this public good. As a result we get underprovision of the public good. Of course, some public goods are privately provided–broadcast radio and television, for example–but I don't see how that business model could work with clean air.

Dagon January 22, 2007 at 7:57 pm

The standard argument against government intervention to correct market failures is that you have to look at government failure, too. The reverse should also apply: the argument against trusting individual freedom (aka "the market") is that you have to look at market failures, too.

In the case of commons which are hard to privatize (including, but not limited to, global environmental issues), it's quite possible that government is inefficient, painful, bloated, coercive, and STILL the best available option.

As always, the question to ask is "compared to what"? I'd say pigouvean taxes are preferable to straight-out rationing. They are probably preferable, even with the crappy implementation we're likely to get, preferable to doing nothing (in this case; I don't buy this argument for many things the government thinks must be fixed).

If not taxation, what DO you advocate to alleviate the problem, and what enforcement mechanism is preferable to government for this particular case?

JohnDewey January 22, 2007 at 11:41 pm

Mankiw claims that higher gasoline taxes will reduce gasoline consumption. At some very high level that is probably true. But real gasoline prices have doubled in recent years without any impact on consumption in the U.S. Consider why:

1. suburban homeowners will not give up their lifestyles and live crowded around their workplaces;

2. commuters believe highly efficient automobiles to be unsafe and uncomfortable;

3. even at $3.00 a gallon, gasoline eats up just a tiny part of income;

4. consumers place a high value on mobility, and have proven highly resistant to all incentives for mass transit.

Mankiw's proposal will not work – pure and simple. Further, a gasoline tax increase is coupled with decreases in payroll taxes, as he has proposed, will cause economic disrution. Wealth will be transferred through government policy from suburban to urban households. Wealth will also be transferred from western states to the dense northeast.

Increased CAFE standards incurs no such wealth transfer, no sudden burden on existing car owners, and no increase in the cost of all transported goods. Furthermore, CAFE standards imposed on all vehicles will work.

Mike Hammock January 23, 2007 at 12:07 am

John, I don't think you're right.

1) People respond to incentives. They will move closer to work if the prices are right.

2) Commuters are wrong, at least in part. The least fuel-efficient vehicles, SUVs, have poorer accident-avoidance abilities, and a higher risk of rollover. Cars have lower rates of fatalities per 100,000 vehicles than SUVs or trucks. Very small cars can indeed be unsafe, but they are not necessarily so (some, such as the new Beetle and the Mini, apparently do surprisingly well). Technology has come a long way in the past twenty years, and features such as traction control can really help in avoiding accidents.

3) True for some people, not for others. On the margin, some people will change their behavior. The longer the span of time, the more elastic demand becomes. Eventually people responded to the high gas prices of the 1970's; we have even more ways to respond today than we did then, thanks to technology. In any case, people did respond to the increase in gas prices: http://www.env-econ.net/2006/05/inelastic_short.html

4) You're probably right here. Mass Transit in the U.S. has been mostly unsuccessful. I'm not sure it's because consumers would never be interested (after all, it seems to work in New York City, although that system started out as private), but I think it's likely that this is one of those areas that governments in the U.S. repeatedly screw up. Perhaps that would change with a sufficiently high gas tax; I'm not confident enough to venture a guess.

You'll have to persuade me that there is something fair or desirable about the existing distribution of payroll taxes. It's true, wealth will be transferred from people who create negative externalities to people who do not–but that's a feature, not a bug. And getting rid of the payroll tax–which is a tax on productive activity, and a tax that reduces in the incentive to work and the incentive to hire–is a net gain to society. That's the kind of economic disruption I can live with.

CAFE standards are antiquated command-and-control regulations best left in the past. Let consumers and producers find the lowest-cost way to reduce pollution. Perhaps it is to produce more fuel-efficient cars. Then again, maybe not–maybe it is to drive less instead, and, in the long run, to relocate to more convenient housing. Maybe not. I don't know the cheapest method to reduce pollution. But economists do know that a market mechanism, which gives consumers and producers incentives to find cheap ways to reduce pollution, is a far better way to go than a government-mandated technology.

JohnDewey January 23, 2007 at 1:38 am

Mike Hammock: "People respond to incentives. They will move closer to work if the prices are right."

Only of the tax is very high. Again, look at what has happened the past 7 years. Gasoline prices have skyrocketed. And the far suburbs have just grown further out.

What's really perverse with you tax freaks is that you want to force the majority of the population to live in a manner they don't want to live. Most of the nation lives in suburbs – because that's what they want to do.

Don't you guys understand that a tax doesn't have a chance in hell of being passed if the majority of voters oppose it?

JohnDewey January 23, 2007 at 1:45 am

Mike Hammock: "Eventually people responded to the high gas prices of the 1970's"

Really? How? They didn't use mass transit in any big numbers. They didn't move closer to work. They did buy more fuel-efficient cars, but only up to a point. The fuel savings realized in the late 70's and early 80's were really the low hanging fruit. Households are not going to give up the roominess and feeling of safety of minivans and SUVs to save a thousand dollars a year.

flix January 23, 2007 at 6:51 am

I love the fact that traffic congestion is used as another example of an externality of driving:
Aren't PUBLIC roads a way of solving the externalities of roads? guess not.
Yet another example of intervention leading to more intervention: Blame the market and increase taxes, it's always worked before…

Mike Hammock January 23, 2007 at 9:25 am

Only of the tax is very high. Again, look at what has happened the past 7 years. Gasoline prices have skyrocketed. And the far suburbs have just grown further out.

They've only had really large (and sudden) increases since the hurricanes hit the Gulf. There has a been a trend upward due to Asian consumption, of course.

What's really perverse with you tax freaks

Calling people names doesn't make your argument any stronger.

is that you want to force the majority of the population to live in a manner they don't want to live. Most of the nation lives in suburbs – because that's what they want to do.

Any policy that corrects a negative externality forces people to live in a manner "they don't want to live". Although I think it would be more accurate to say that a good policy gives people the incentive to live as though they were taking into account the external costs they impose on others. If I could not be sued for dumping garbage on my neighbor's lawn, I might do so. Forcing me to pay my neighbor damages would force me to live in a way I don't want to live, but it would be welfare-improving.

Don't you guys understand that a tax doesn't have a chance in hell of being passed if the majority of voters oppose it?

And the War on Drugs will probably never be ended, and school vouchers will probably never be implemented on a large scale, and all sorts of other good policies will never happen (and many bad policies will survive). A carbon tax or gasoline tax may never be implemented for political reasons, but that doesn't mean it's a bad idea.

Mike Hammock January 23, 2007 at 9:33 am

Apparently HTML doesn't work in these comments; I have tried to use italics to indicate quoted comments. Sorry about the resulting confusion in my posts. I'll resort to old-fashioned quotation marks.

"Really? How?"

Two ways: reduced purchases of gasoline and smaller, more fuel efficient cars. Perhaps those really are the cheapest and best ways to respond to higher gasoline prices. One of the advantage of a market-based regulatory mechanism (such as tradeable permits or pigouvian taxes) is that the market finds the cheapest way to respond.

"The fuel savings realized in the late 70's and early 80's were really the low hanging fruit."

Thanks to technology, the tree of fuel efficiency is producing more fruit all the time. Auto manufacturers are investing a lot of resources into alternative engine technologies. Some, such as ethanol, are probably a bad idea made possible by poor policy, but others have a lot of potential.

"Households are not going to give up the roominess and feeling of safety of minivans and SUVs to save a thousand dollars a year."

SUV and truck sales are already down significantly from a couple years ago, while small car sales are up significantly. People can and do respond to incentives.

Robert Coté January 23, 2007 at 3:12 pm

John Dewey correctly observes: "What's really perverse with you tax freaks…"

To which Mike Hammond retorts: "Calling people names doesn't make your argument any stronger."

That isn't name calling. John makes an asute observation. We already tax, double, triple, quadruple tax privately operated vehicles and massively subsidize transit and only by manipulating the statistics is transit holding gross ridership in a burgeoning population. The problem with Mankiw and his adherents is that they are hiding their true agenda. They don't want to incorporate the externalities of POV mobility. They don't even want to charge more for the neagitve externalities. They want to punish automobilia for imagined sins in the unspoken and misguided idea that by increasing the pain of using autos people will change behavior to those more esthetically pleasing to the would be social engineers delicate sensibilities.

Adam Malone January 23, 2007 at 3:17 pm

JohnDewey-

I agree and disagree with you on this issue. Like Russell, I have a problem with increasing taxes on fuel and/or road use when it is more likely that those taxes collections will result in increased spending rather than a decrease in other taxes. But there are some externalities to driving.

I am not a believer in the global warming theory, but pollution is obvious. Houston & Los Angeles have pollution problems that are obvious, and generally this pollution can be traced to vehicles. Pollution is a negative externality, period.

But there are at least two reasons why public transportation has not caught on in the US:

1)Gas prices have not risen sufficiently to "encourage" the use of public transit.

2)European and Japanese rail transportation hinges on large urban centers with relatively insignificant suburbs.

A Pigouvian tax would raise the price of gas to the consumer.

But as evidence of the fact that gas prices have been impacting the choices of consumers you simply have to look at the number of auto companies and VCs that are investing tons of money in alternative fuel and high efficiency vehicles.

Comparing current investment with that of just 10 years ago shows that companies are more interested in the technology. And generally companies have one goal…make some money by satisfying customer.

Robert Coté January 23, 2007 at 4:07 pm

The thing about pollutin is that we are internalizing the costs. Thus $1500 per auto in catylitic and other pollution controls. Thus the 10% air added to California gasoline that makes it MORE expensive while getting poorer fuel mileage. What mankiw and his ilk want to do is abritrary and capraciously assign imagined external costs and then charge for them and use the money in some cases to increase the problems. Congestion charging is a good example.

ben January 23, 2007 at 4:13 pm

Apologies if this has already been mentioned. I believe one or more studies have demonstrated that existing taxes on gasoline are more than enough to internalise gasoline externalities. Motorists are already paying the costs of their pollution.

john henry January 23, 2007 at 9:04 pm

I'd like to see a $1-2/gallon gas tax. Phased in perhaps 10 cents a month for 10-20 months.

I hate the idea of the govt having more money so would offset it by lowering other taxes. Perhaps the employee's portion of SS, but I am open to discussion.

I would not tax coal, nuclear, ethanol, oil shale, tar sands or other forms of energy.

If we raised the cost of gas we would cause permanent changes in our energy consumption. We would send less money to the various countries that dislike us and cause us trouble. They need to sell oil much worse than we need to buy it.

Let them choke on their oil.

John Henry

Mike Hammock January 23, 2007 at 9:16 pm

My last name is Hammock, like the swing. Not Hammond. It's a very common mistake, but I'm not sure why.

"That isn't name calling."

Calling someone a "freak" when one disagrees with them is name calling.

"John makes an asute observation. We already tax, double, triple, quadruple tax privately operated vehicles and massively subsidize transit and only by manipulating the statistics is transit holding gross ridership in a burgeoning population."

We also subsidize energy consumption, production, and exploration, and we have probably built too many roads (I'm guessing that the total benefit of the interstate highway system exceeds total costs, but that we have built beyond the point at which marginal cost equals marginal benefit). I'd be happiest if we eliminated all these subsidies, eliminated CAFE standards, and simply implemented a carbon tax, using it to replace payroll taxes. I would not favor such a tax if it were not used to replace payroll taxes (or some other harmful taxes).

"The problem with Mankiw and his adherents is that they are hiding their true agenda."

No they're not. Do you really think there is some conspiracy going on here–that Mankiw is some evil mastermind trying to trick everyone? He's a respected academic economist. I do not think that Russell Roberts would have had Mankiw on his podcast if there was a chance Mankiw had some secret motivation to simply "punish automobilia for imagined sins in the unspoken and misguided idea that by increasing the pain of using autos people will change behavior to those more esthetically pleasing to the would be social engineers delicate sensibilities." You're simply resorting to ad hominem instead of discussing the actual policy.

I mean, suppose someone accused Russell Roberts of hiding his true agenda–to protect the profits of oil extractors and refiners, in order to earn higher returns on his oil-oriented investments? That would be a stupid, dishonest, and insulting argument. If you're not going to grant Mankiw and his ideas the respect they deserve (and the respect that Russell Roberts gives them), it would probably better just to avoid discussing it altogether.

fiona January 24, 2007 at 12:24 pm

Consider that not only private vehicles would be affected by this tax. Almost everything we buy everyday, from food to electronics to clothes is shipped in trucks that use petroleum. There is little that I, the consumer, can do about this. Taxes on gasoline in private cars will hit family pocketbooks directly, but what about the additional cost of goods? Also consider that sales taxes are based on the price of goods and you have a multiplier effect, shovelling more into the pockets of governments on all levels.

Robert Coté January 24, 2007 at 3:33 pm

John Dewey,
What say ye? Does Mike get the full treatment of; The IHS-Greatest Investment Ever Made, Tax breaks are Not Subsides, Pay Your Own Operating Costs Month, Not Enough Roads, …? Or has he already drunk too much transit kool-aid to be saved?

Mike Hammock January 24, 2007 at 7:50 pm

Robert, that is a good point–tax breaks are not subsidies (although I do not believe we should be handing out special tax breaks and making the tax system more complicated than it already is–although that is another issue. Heck, if we're going to discuss corporate income taxes, I'd like to go on the record as being in favor of eliminating them altogether.). Energy assistance programs are a form of subsidy, however.

It seems odd to argue that the Interstate Highway System is the greatest investment ever made, while also arguing that government is too incompetent to ever implement a policy that could address pollution externalities.

In any case, I didn't say it was a bad investment–only that we had built roads beyond the point at which marginal benefit equals marginal cost. You should also keep in mind that we don't have the counterfactual for comparison. What would have happened in the absence of the interstate highway system? Would (private) trains be more important and successful as transportation?

I'm not sure what you mean by "Pay Your Own Operating Costs Month".

I'd also like to add that it's disappointing that this excellent blog is populated by so many who post with such condescension.

Fiona, if the negative externality exists, and if the tax is chosen correctly, then your complaint is actually a feature, not a bug. The fact that markets pass on the cost of the externality to others via prices is part of why pollution taxes and tradeable permits work so well.

ben January 24, 2007 at 8:10 pm

"The problem with Mankiw and his adherents is that they are hiding their true agenda."

This is the sort of comment that usually appears when its author has either run out of arguments or can't be bothered making one.

But let's say you have this position because there is something in the Mankiw argument that indicates his true motive. How about just pointing us at to that part of the argument.

python January 24, 2007 at 9:03 pm

Ben says:

" 'The problem with Mankiw and his adherents is that they are hiding their true agenda.'

This is the sort of comment that usually appears when its author has either run out of arguments or can't be bothered making one."

Ben, your statement is obviously not true. Reasonable thinking people can look at motives of people before they start to question the actions. I would prefer that people question motives first, it shines light on the observations.

When you know that the "true agenda" of most politicians is to simply get re-elected, you start to think of their policies differently. The sooner you question motives the sooner you dispense with worthless debate about merits.

For you to make your statement shows me that you have run out of arguments. :-)

I would like to see the study that shows that gas taxes a) has caused substantial change to people's behavior, b) have been used by the government to reduce externalities (rather than just put into the big bin of tax loot.) I didn't read the whole thread so I apologize if it has already been mentioned.

Robert Coté January 24, 2007 at 9:09 pm

Prof Mankiw is unwilling to accept several facts. Yransit costs 4 times as much as POV on a passenger mile basis. Alternatives to POV mobility do not generate positive externalities like POVs. The negative externalities they wish to assign to POV mobility are absolute and not relative to alternatives.

I could go on but if we were to count positive externalities like Mankiw counts the negatives we could point out that auto exaust contains oxygen and is thus a generator of O2.

Robert Coté January 24, 2007 at 9:48 pm

I'm not sure what you mean by "Pay Your Own Operating Costs Month".

A thought experiment proposed more than a dozenyears ago that showed POV mobility was taxed and transit was subsidized yet POV was prefered and cheaper for everyone.

Python January 25, 2007 at 3:48 am

Mike Hammock,

I'm not sure how you got from my comments (in response to Ben) to your comments (Mankiw is not a politician). I was making an analogy regarding the act of questioning an agenda, which I consider a part of critical thinking. And as far as vitriol, I must have missed that too. Doesn't vitriol mean something like bitterly abusive speech? Is the word "freak" vitriolic?

A link to a study where the data ends at 1991? Isn't that like 16 years ago or something? :-) Hopefully, we can get some a newer study from somewhere.

At California DMVs they have these big pie charts showing how car registration money is spent. They seem so proud of it, because it's in all of their literature also. But it clearly shows that only a small portion of vehicle registration goes to anything remotely to do with transportation. And recently California voters voted down a Proposition which mandated that all gas tax go to Transportation related projects (including environmental research, etc.) I am thoroughly unconvinced that extra tax moneys collected in a gas tax would be used to promote either cleaner or friendly transportation. Certainly a high gas tax would lessen the amount that people choose to drive, that's not news to anyone, but there are obvious costs such as freedom of mobility, efficiency of transportation, increased freight costs, Detroit going further in the tank, etc.

Listing traffic as a negative externality of driving seems like suggesting that a forest is a negative externality of a tree's life-cycle.

Can we put a Pigouvian tax on the sale of suicide bomb belts and IEDs?

Mike Hammock January 25, 2007 at 11:58 am

Those two studies were merely two of the links that came up under a simple Google search. If you're really keen to find more recent studies, you're welcome to look for yourself. Price elasticity of gasoline demand has surely become greater than it was in the older studies, in an case.

Ben's comment was in response to someone Robert Coté, who said we should question Mankiw's true agenda. Ben (and I) replied that this is a poor argument that gets us nowhere. You replied that it makes sense to question the agenda of politicians. I respond that we're not talking about a politician; we're talking about Mankiw. Mankiw doesn't have some secret, hidden agenda. It might make sense to question true motives in some circumstances, but it does not make sense in this circumstance.

As for vitriol:
"Or has he already drunk too much transit kool-aid to be saved?"

"The problem with Mankiw and his adherents is that they are hiding their true agenda. They don't want to incorporate the externalities of POV mobility. They don't even want to charge more for the neagitve externalities. They want to punish automobilia for imagined sins in the unspoken and misguided idea that by increasing the pain of using autos people will change behavior to those more esthetically pleasing to the would be social engineers delicate sensibilities."

"What's really perverse with you tax freaks is that you want to force the majority of the population to live in a manner they don't want to live."

This is not the language of a serious and mature discussion of policy. This is ad hominem and insulting conspiracy theorizing. Certainly not everyone in this thread posts in this manner, but some do. It is a very natural and common human response to try to assign people to sides of a debate, and judge them evil if they disagree with oneself–but it is a response to be avoided.

Let me throw out another possibility, just to make it harder for anyone to put me on the side of "tax freaks" and make it more difficult to discover my "true agenda": If gasoline demand is getting more price elastic, and if higher gas prices increases research into alternative energies, then it may not be possible, in the long run, to replace payroll taxes with pigouvian taxes and maintain revenue neutrality. That is, people may shift away from gasoline to such a great extent that the tax cannot raise enough revenue to replace payroll taxes. This would be particularly important fifty years from now, when we may be using some other energy source for transportation, and when Social Security and other programs funded by payroll taxes are facing financial difficulty.

Robert Coté January 25, 2007 at 2:25 pm

The problem with fully costing use taxes for transportation at the most basic user level is that it would kill transit instantly. That is not an optimal outcome and the exact opposite of what the POV higher tax advocates imagine. Oh? Transit is to exempted? Why? It is transportation, it has enumerable internal and external costs and it uses the public roadways. This is where Mankiw breaks down, no oner on his side can justify special treatment for transit based on the arguements they advance for charging POVs. This is why I conclude the Pigou tax scheme is but a cover for a pro-transit anti0automobilia agenda.

Mike Hammock January 25, 2007 at 3:20 pm

Has Mankiw actually said that public transit should be exempted from Pigouvian gasoline taxes?

Robert Coté January 25, 2007 at 3:23 pm

Yes. Is that such a departure that I have to dig up the references?

Mike Hammock January 25, 2007 at 4:06 pm

If you don't mind, I'd appreciate that. I've been searching his blog, and I can't find any posts in which he says that mass transit should be exempted. Clearly it should not be exempted; a gallon of gasoline burned by a large bus produces just as much CO2 as a gallon of gasoline burned by a Prius. It may create a smaller congestion externality, but then again, that will be in part reflected in its lower price per mile traveled.

Robert Coté January 25, 2007 at 4:50 pm

Okay, I'll dig it back up. In the mean time there is no "lower price per mile traveled" with transit. Transit mobility costs roughly 4x what POV travel on a per passenger mile cost basis. At that it is also twice as slow so the lost opportunity costs are even higher. How's that for an externality most people ignore?

And CO2. Remember that POVs do not emit particulates but that transit vehicles are exempted.

Congestion; that's an interesting assertion. The places with the most transit are the most congested. Careful analysis is unable to disprove the idea that transit CAUSES congestion. It's like the debunked Hansen/Yuang induced demand assertions. The data do not support the conclusion.

Here it is:
"Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways." – Prof Mankiw
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

There's lots of this but hopefully we can just accept that part of the Mankiw Agenda involves inducements favoring transit.

Mike Hammock January 25, 2007 at 5:29 pm

The market works either way; if transit is higher cost per person-mile traveled, then people will continue to avoid it, as they should. If it ends up being cheaper (probably because of the emergence of privately operated buses or jitneys or other alternatives, assuming transportation unions do not crush them), then that's fine, too.

Mankiw did not actually say in that quote that mass transit would be exempted from gasoline taxes. He said that gasoline taxes would increase the incentive to ride mass transit. It is conceivable that a $1.00 increase in the gas tax would increase the cost of a person-mile traveled by POV by more than it would increase the cost of a person-mile traveled by public transit. That doesn't mean that public transit would become cheaper, of course–only that the cost gap might narrow. This is especially true for public transit that is not powered by gasoline.

Interesting; are you arguing that induced demand can never occur, or that none of the studies purporting to show it have actually shown it, or both?

POVs do emit particulates, albeit in much lower amounts than they once did. Also, I'll agree that public transit should have to face the same per person-mile emissions standards as the competition.

Robert Coté January 25, 2007 at 6:23 pm

And just how would an equal application of increased fuel taxes incentivize transit usage? This isn't a big deal. Mankiw wants more transit usage. In the tradition of "The Onion" he appears to want more transit for other people. Regardless, the presumption that increased fuel taxes would alter the POV/transit shares is nonoperative.

Mike Hammock January 26, 2007 at 8:37 am

"And just how would an equal application of increased fuel taxes incentivize transit usage?"
This could happen if:
-The gasoline used per person-mile by gasoline-powered public transit is less than POVs.
-Some public transit methods do not use gasoline, and therefore are not directly affected by the tax.
-Public transit fares are fixed by law and do not rise with gasoline taxes (This still means costs rise, of course, and will either mean smaller profits or, more likely, larger losses, which means taxpayers pay more to cover the loss–but that's not the same as fares rising, and will not deter ridership).

Those are just three possibilities that would narrow the gap between the price of personal vehicles and public transit. There may be other possibilities. I think the point stands: Mankiw has never explicitly said public transit should be exempt from gas prices, and nothing he has said necessarily implies that it should be exempted, so far as I know.

Mike Hammock January 26, 2007 at 8:37 am

Sorry, that should be "Mankiw has never explicitly said public transit should be exempt from gas TAXES…".

Saeed January 27, 2007 at 8:47 am

For those of you who advocate solving the externality problem using private means, rather than by government imposed solutions, help me to understand why a private solution has not already solved it.

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