Saturday, July 5, 2008

Bryan Caplan stirs up a worthwhile Pigou discussion

Bryan Caplan respectfully declines entry into the Pigou club and explains the problems he has with its reasoning: doesn't it imply that there needs to be a Pigou tax (i.e. tax on a negative externality intended to make its cause accounted for in decision-making) on, say, women showing their faces, if indeed this makes people unhappy (perhaps because the society strongly favors Sharia)?

Throughout the discussion, commenters come close to making the point I've made before, that negative externality complaints are fundamentally about justice, not efficiency (see two paragraphs above ==-break). In other words, given the archetypal example of the factory throwing off air pollution, the thing that makes people object to such scenarios is that they believe the polluter is victimizing those that must breathe the air. To respond, as economists do (often invoking Coase's Theorem), that well-defined property rights will lead people to negotiate to Pareto-improvements, misses the point. People generally don't find it right that someone should have pay others not to pollute, and finding a cheaper way to broker the deal doesn't help matters.

(Actually, the best argument I could make to get this point across can't be made in words. Rather, it would be a rev a motorcycle very loudly at you while you're trying to sleep, but in just such a way that there wasn't any law against it. Your reaction would be the sentiment I'm trying to express.)

So, in order for externalitities to make people want laws, they must not only bother others, but do it in a way that offends others' sense of justice. To people in modern liberal democracies, seeing a woman's face exposed just isn't going to do the trick. But elsewhere, it just might. To those societies, the advice an economist would give is: hey, don't ban exposed faces outright! You're missing out on tremendous gains! Instead, levy a high tax on it, and distribute the proceeds to everyone. Women adamant about showing their faces win (they'd prefer at least having the option to buy face-showing permission, even if they intend to fight such laws), and people getting the money win!

To the more objectively demonstrable global harms, there's no reason Caplan shouldn't want the same thing: don't take the extreme measure of banning pollution, but let anyone pollute, so long as they're willing to pay a proportional share of the harm done to others.

EDIT: Cleaned up first parenthetical to make it coherent. Yikes!

1 comment:

Gene Callahan said...

"To respond, as economists do (often invoking Coase's Theorem), that well-defined property rights will lead people to negotiate to Pareto-improvements, misses the point. "

By the way, Coase strongly rejected this idea! He held that we are not in the world of the Coase theorem where transaction costs are low, so these things gnerally will not be efficiently negotiable.