Tax interaction effects, and the libertarian rejection of user fees

Phew! Been a while, hasn't it?

I want to come back to the tax interaction effect (TIE) issue from previous posts, and go over what I think has been bothering me about the TIE-based argument against the carbon tax shift.

So, a high-speed review of why a carbon tax shift (CTS) is inefficient. The CTS, remember, involves a revenue-neutral reduction of taxes on capital (including land) and labor, replaced by a tax on carbon emissions -- specifically, those fuels that, when used, release carbon dioxide, in proportion to how much CO2 they release per unit.

Review of the argument

And why could it be inefficient? Well, the harm of a tax increases faster than its rate. To have a revenue-neutral CTS, you have to "focus" the tax -- i.e. raise the same revenue from a smaller class of goods. This necessarily means a higher tax rate on the "focused" goods, and therefore higher induced inefficiencies (compared to the broader tax). When you further note that these taxes will, in effect, "stack on" to the existing labor and capital taxes, then the inefficiencies are even higher -- that's the TIE -- and could even swamp the environmental benefit from the emissions reduction."

But hold on. Those very same steps are a case against any correspondence between "who uses" and "who pays", whether or not the payment is a tax! That's because you can always point out how "concentrating costs" leads to disproportionate inefficiencies, even and especially for textbook "private goods".

That is, you could likewise say, "if people have to -- gasp! -- pay for their own cell phones, at $300/each, then that scares away all the people who can't pay $300 (after paying labor taxes, remember!), so you can an efficiency loss there. Plus, anyone who can steal the phone has a $300 incentive too, so people invest in ways to steal them, and you have to pay for countermeasures. Those go up quickly with the price of the good.

"Therefore, the government should just tax everyone to cover the cost, and then hand out the cell phones for free."

Wait, that doesn't sound right ...

What's wrong with that argument? Well, a lot. So much that you probably already know the answer. It's for the very same reasons that many advocate user fees for any good that's excludable. Generally, whoever benefits should be the one to pay. ("Cuius lubido, eius sumptum." -- "Whose desire, his expense.")

As with those reasons in favor of user fees, you can make the exact same argument regarding the purported inefficiency of a CTS:

"Yes, you get inefficiencies every time you concentrate costs like that. And yes, they disproportionately stack with whatever taxes you already had. But you need the fee structure to work that way in order to align incentives. The one who uses the scarce resource -- whether a cell phone, or atmospheric dumping capacity -- should be the one to pay for it, as this leads them to economize on the use of that resource, and if possible, route around it. That remains doubly so when exempting them from the expense would lead to further penalization of every other class of socially-useful activity."

And that, I think, goes to the core of my original balking at the CTS/TIE argument.

I explain tax interaction effects (because I think the experts can't)

So it turns out there's a serious argument (HT and text summary: Bob Murphy) that a "green tax shift" may be welfare-worsening rather than welfare-improving. (The green tax shift is where you cut taxes on labor and capital while raising them on environmental "bads" like CO2 emission.)

Huh? How can a tax shift off of bads and onto goods be welfare worsening? It seems the argument is somewhat subtle; even Bob Murphy dismisses clarification requests in the comments, pleading that "it’s hard to point to 'what’s driving the result' except to say, 'Adding the carbon tax drove the result.'"

Well, it's actually not that hard, but the standard expositions don't make it explicit. After reading another of Murphy's articles, it finally clicked for me, although the better explanations still hid the true mechanism in unstated assumptions. Here's how I explained it in the comments (cleaned up a bit and sourced).
****
I think I have an explanation that conveys the intuition.

Insight 1: the harm of a tax is more-than-proportional to its magnitude. (This is the assumption that the writing on this seems to assume and which I wish was made explicit here and in your article.) Mankiw gives the rule of thumb that the deadweight loss of a tax increases with the square of the tax rate. Thus why you want to raise a given amount of revenue from as “broad a base” as possible -- to lower the rate each tax has to be.

Insight 2 (most important): Because of the above, each increase in tax above the Pigovian level is more harmful than the same increase from zero.

Insight 3: Taxes on anything chase back to their original land/labor/capital factors. So a carbon tax amounts to a tax on land, labor, and capital, divided up per their relative supply/demand curve elasticities (slopes).

Given the above, the intuition becomes a lot clearer: a tax on carbon is like an income tax (with different levels for different kinds of income). Levied at the Pigovian rate, it merely cancels out the carbon harms. But if you have an additional (direct) income tax, you get a disproportionate harm for each (potentially) taxed dollar above the Pigovian level (compare to taxing from the first dollar) — *that* is the tax interaction effect.

Furthermore, since the “green tax trade” tries to raise the same revenue on a smaller base (i.e. only those income sources touching carbon), the tax rates have to be much higher than they would be if they were on all income. This then causes major welfare-harming changes in behavior, far out of proportion to the assumed harms from carbon.
****
Problem solved, right?

Well, no; Bob insists that Insight 1 is irrelevant to the argument. But I don't see how this can be; you can only get the bad "tax interaction effects" if the tax's harms are more-than-proportional to ("superlinear in") the tax rate.

If it's merely proportional, the taxes don't "interact" at all -- raising taxes by 1 percentage point (on any kind of income) does just as much additional harm, regardless of whether it's on top of a 6% existing tax, or a zero. But when it's more than proportional, then that extra point of tax is (badly) "interacting" with whatever other taxes got it to that level. This is the key insight: that having income taxes in addition to the (implicit income tax resulting from a) carbon tax means those taxes are doing more harm than they otherwise would.

Likewise, if the harm (deadweight loss) of a tax were less than proportional to (sublinear in) the rate, then they would interact in the opposite way. It would make sense to have as few distinct taxes as possible, on a small a base as possible, with as high a rate as possible -- because in that case, each additional increase in the tax rate hurts less than the previous. (Obviously, we don't live in that world!)

I note, with some irony, that this point ultimately reduces to the reasoning behind standard mainstream economist's tax advice to "lower the rates, broaden the base", a mentality Bob actually criticized in another context...

World's newest space agency: Reuters

I normally don't pay much attention to photo credits, but I had to do a double-take on this one. An article in the Telegraph has a satellite picture of the sun. Of course, to get that kind of picture, you have to get pretty close, exist in a high temperature environment, and have photography equipment capable of significantly attenuating the EM radiation thrown off from the sun

And who do they credit for the photo? NASA, right? No, we get:

Professor Henrik Svensmark argued that the recent warming period was caused by solar activity. Photo: REUTERS

Um, yeah dude. I think Reuters got that photo from someone else. With the budget cuts the media have had to make in the past few years, they can only afford near-earth satellites. Deeper-space probes are just out of the question.

ANYWAY, since I haven't posted on Climategate, or for that matter, anything in a while, here are my thoughts: It's absolutely disgraceful, the way the scientists in question have acted. Disclosure of your data does not mean that skeptics get to go on a multi-year scavenger hunt to find your raw data and then play guessing games about which sources you threw out and why.

The very fact that you have to make a post like this one in order to summon forth all the data is proof that you weren't being transparent enough.

There's also clear evidence that the scientists didn't seem to understand that you can't contort one data source to look like another and then call it two independent sources of data. Eric S. Raymond has done a tremendous job at exposing the tricks in the code, which explains exactly why the insular climate science doesn't want critics poring over their work

Oh, and just a hint: when you only allow people you approve of to review your work, that's not science.

PS: Recall that my outrage at many libertarians has been to their reactions *conditional* on AGW being real, and that outrage remains.

Fun with graphics and the environment!

Well, the Environmental Defense Fund has a cute graphic out (HT: Free Advice) promoting "green jobs":



The basic idea, as you probably figured out from the graphic, is that mandating pollution caps will give people something to do, thus reducing unemployment. They don't put it that way, of course, but that's the idea, and it's a rehash of the Broken Windows Fallacy.

This justification for pollution restrictions misses the point, of course. Assigning well-defined, sustainable pollution rights is a good idea, for the same reason that assigning rights to any scarce resource is a good idea: because of justice and efficiency, not because it would add another task for people to do.

In light of all of that, I decided to pull a SomethingAwful and put different words into the graphic, in an attempt to criticize my nemesis Bob Murphy's (of the Free Advice site linked above) sudden love of Coasean extortion payments when it comes to pollution. Enjoy!

Well, I guess I don't count as a libertarian anymore

Yesterday I was kicked off the private LibertarianForum Google Group and mailing list. The reason was that I had the audacity to remind other libertarians of the responsibility side of liberty (with respect to global warming), and for pointing out flaws in really stupid arguments against intellectual property (and, conversely, explaining how an IP-free system is vulnerable to Mises's economic calculation critique). The proverbial last straw was a discussion sparked by someone linking this TokyoTom post about Bob Murphy finally admitting, after being dragged kicking and screaming, to admit he misled readers in his op-ed, though of course he's not going to actually say it where any victims of his deception are going to see it.

The head of the list claimed that he was deluged with requests from people who were asking me to be removed, and who apparently lacked the guts and the brains to actually explain where my points were in error. I'm not going to name any names.[1]

Naturally, people are going to claim that, oh, it wasn't what I said, but my rudeness. This is ridiculous -- it's standard practice on the LibertarianForum list to use the exact same tone I did, as even my detractors readily admitted. A more plausible claim would be that the people there didn't like being uncomfortably reminded of the implications of their stated (though certainly not actual!) beliefs.

So why the title of this post then? I believe, after all, everything I did before. But look at it this way: time and time again, I see people nominally also "libertarian" reveal themselves to have been coming from completely different premises. I never imagined that I would see, for example, Bob Murphy take the attitude of, "Oh, did I destroy your land with my CO2 emissions? I got it! Here's the solution! Fix it your own damn self!" (Yeah, way to preach responsibility and universal adherence to basic morality there...)

There's only so many times I can see cases like that before the self-appellation "libertarian" obscures more than it clarifies.

So what to call myself now? One good option is Birchian, after Paul Birch (a former Anti-State Forum contributor), since I've been seeing my views more and more resemble his, especially in terms of focusing on whether the victims of one's actions have been adequately compensated.

Alternatively, I could -- gasp! -- call myself a mutualist as per the philosophy of Kevin Carson, my former nemesis. (As recently as July of this year he quipped that I couldn't grasp an argument even with velcro-covered mittens!) The reason for that term would again be because of my focus on the extent to which nominally "libertarian"-favored activities are in fact predicated on the state stepping in an exempting certain groups from having to actually bear its true cost.

Before inferring too much from this post, I ask that you heed this caution: There is a big difference between "Problem X is often overstated in an attempt to give politicians more power" and "Problem X doesn't exist." I certainly sympathize with those who have seen so many phony environmentalist rationalizations for statist measures that are thinly-veiled attempts to shut down markets, that they hear about Problem X and immediately view it as the former. But ask yourselves: has the tide turned to the point where it's more common to see anti-environmentalist arguments as thinly veiled attempts to shove onto other people, costs that the arguer should be bearing?

[1] Since a lot of you might be sketchy on terminology, a so-called "name" is a label used to refer to a specific instance of a proper noun. An example of a name might be Brad Edmonds or Max Chiz.

The Bob Murphy and Gene Callahan problem

If you've read their post about banning me, you may have by now a one-sided view of the dispute. I will explain here why I make so many posts on their blog that they find annoying. (some links missing and I apologize)

1) I have called out Bob on his deception of readers. As Bob admits here, his shameful op-ed was written to convince the public that carbon caps are necessarily stupid, a position he rejects. Now, when you are so misleading -- basically trivializing the suffering of hundreds of millions of people to justify why your gas should be cheaper -- yes, it will make you livid when someone points this out in front of others, and Bob's desire to ban me is a predictable manifestation this effect.

2) I regularly call out Gene on his selective invocation of rules of civility. Hey: having a civilzed discussion is great. But here's how Gene defines "civility":

Acceptable behavior:
-Lying about what someone believes (geo-engineering thread)
-Lying about the economics and morality of tradeable pollution caps (the op-ed above)
-Assuming the worst possible interpretation of any argument someone makes. (The discussion on the iMac and the "He must own the place" thread)
-Personal attacks, when Gene or Bob is making them. (apple thread and recent posts resulting in the ban consideration)

Non-acceptable behavior:
-Personal attacks, when Silas makes them.
-Asking for clarification (iMac thread)
-Suggesting that someone did in fact read a blog post just before submitting a full essay on it (in the case of Bryan Caplan's challenge)
-Mentioning that someone should have known something, given his job. (geo-engineering thread)
-Mentioning that someone know about the philosophy of others, given his job. (same)

Note here: Bob and Gene have repeatedly claimed that even when I do have a valid point, they dislike my posts because of the "tone". Well, I'll admit it: I do use a harsh tone, and I should. Their mistakes go well beyond the point where I can attribute it to mere stupidity or ignorance. They reflect a corrupted philosophy, one that says, "Whoa, you thought libertarians supported principled, private property rights? Hell no! We support cheap oil, first and foremost, even and especially if it permanently floods the residences of hundreds of millions of people. The right to slightly increased profits OBVIOUSLY supercedes the right not to have your homesteaded land permanently submerged."

When you have whored out your ideology, and so cheaply at that, a constant reminder from some, some ... nobody will put you into overdrive. It will cost you sleep. It will want you to shut up that voice in any way you can. Hence, the discussion of whether to ban me, which is where we are today.

I am appalled at the way libertarians have reacted to the global warming issue. While libertarians like Bob may have made valid cases why right now carbon caps can't be justified, in doing so, many of them have tipped their hands as to what philosophy they were really following the whole time -- and it's not pretty. If you were confused as to why I've been so harsh, you no longer are. And it is instances like these that give serious substantiation to the claims of those like Kevin Carson who say that many libertarians are more interested in shoving costs onto others than in seriously establishing principled private property rights.

In Bob's defense, he has written a paper on how a private law system would handle the current global warming evidence we've faced. I find it unacceptable (as I do Gene Callan's attempt to solve the economic calculation problem with protests), but we can save that for when it's publicly available. For now, I just want you to note Bob's prioritization: first, ridicule all attempts to define clear rights in the atmosphere. Then, much later, if ever, try to sort out what the libertarian position on atmospheric rights actually is. Oh, and support atmospheric socialism until a serious problem comes up.

Setting scarcity straight, once and for all

In case you haven't been following, Bob Murphy wrote a shameful op-ed on the proposed Cap-and-Trade scheme, which prompted quite a bit of criticism from me and "TokyoTom" (good summary). If Bob were merely claiming that politicians screw things up, none of us would have objected. Unfortunately, he said a lot more than that. The focus of this post will be on his claim that carbon emission caps "don't reflect scarcity".

Now, as you see in the exchange, Bob tries to claim that what he really meant was that if the carbon cap were too low, or somehow not correct, that wouldn't reflect scarcity, but otherwise it would. If you follow the exchange, you'll see how I showed that there is no possible way, based on the phrasing of his argument, that he could claim the op-ed meant that. Nevertheless, he has repeatedly gotten considerably sympathy from others (not me) with this last-ditch attempt to salvage himself from having to apologize for his op-ed, by arguing that, so long as government doesn't precisely set the cap to what the perfect, pure, austere free market would, the cap still would not reflect scarcity and he was technically correct.[1] I will now show how even this claim is wrong, by starting from a simple case, and working up to the claim Bob made.

Economic scarcity refers to the situation where "not all of society's goals can be pursued at the same time; trade-offs are made of one good against others." Now, let's see where this takes us.

Problem #1: I want to hit Bob. Bob does not want me to hit him. Does scarcity exist?

Answer: Yes, because it's impossible to satisfy the social goals of both me hitting Bob and Bob not being hit by me.

Problem #2: I attempt to hit Bob. Bob retreats to his house and locks himself inside. I attempt to bypass the locks. Does the difficulty of getting to Bob reflect scarcity?

Answer: Yes. Since my goal comes at the cost of Bob's, Bob will take measures to ensure I do not reach mine. The lock, a manifestation of Bob's desire not to be hit, therefore reflects scarcity.

Problem #3: Having such difficulty getting past Bob's locks, I instead try to act out my anger against him by sending 100 locusts down his chimney. I would have sent more, but my insurer restricted me to having only 100 locusts at any given time. Does this restriction on my ability to carry locusts reflect scarcity?

Answer: Yes. In deciding the max it will allow me to carry while maintaining coverage, the insurer must consider how badly I can hurt others with a given number of locusts, since hurting others can cause me to be liable for damage. The limit, being a mechanism by which the conflict with the desires of others not to be hurt manifests, therefore reflects scarcity.

Bonus answer: Note that locusts are not guaranteed to hurt Bob, but the more I send, the more likely that is. So the limit on how many locusts I can have only reduces the harm to Bob in a probabilistic sense. However, the limit still reflects scarcity.

Problem #4: Same situation, but in an alternate universe. There is an intrusive government that passes laws in an attempt to minimize conflict between its subjects and thus maximize its looting; insurers of the type above don't exist. It has decreed that people may own 146 locusts, but no more. In trying to buy more than 146 locusts, a red flag goes up, and I am prevented from buying any more. Does this difficulty in buying locusts reflect scarcity?

Answer: Of course. Whatever criticism of government you might make, its decrees ultimately rule in favor of some goals and against some others. Therefore, when it hinders one goal (such a stopping locust attacks) in preference to another (such as the goals of locust-lovers in keeping collections), this is a manifestation of scarcity.

Problem #5: What if the government's limit were 23 instead? Or 100? Or 0?

Answer: Yes, it still would reflect scarcity. No matter how closely or poorly it approximates what limits would result from market processes, the above reasoning applies.

Problem #6: Scientists reveal that emitting substance X increases the probability of catastrophic damage. The governments of the world then place an overall emission cap of C. As a result of the cap, the price of doing things that result in X emission goes up. Do the higher prices from the cap reflect scarcity?

Answer: Yes, for the same reasons as in #4: the higher prices ultimately result from the (probabilistic) conflict with the goals of others. Yep, even substance X is CO2.

Problem #7: If Bob responded to the above line of reasoning (about scarcity) by saying that the proposed scheme is not a Blicknorg [2], is that responsive?

Answer: Don't be ridiculous; that's just changing the topic.

Long story short, the caps do reflect scarcity.

[1] And how would you ever learn what cap a free market would set? Why, you first have to price all resources, including and especially the atmosphere. Anyone want to take a wild, wild guess as to the ratio of the words that Bob has spent:

a) advocating that atmospheric property rights be clearly delineated,
to the words Bob has spent
b) demanding that government NEVER do a SINGLE thing to in any way define such rights?

I'll give you a hint: it's somewhere between "zero" and "can I have what you're smoking?"

[2] Actually, in the discussion, what Bob actually tried to do to refute the solid argument that caps would reflect scarcity, was claim that the caps are not a "market solution", rather than a Blicknorg. However, since he refused to ever clarify what exactly that meant, despite being asked several times, he might as well have said Blicknorg.

Hee hee hee! ur so clev4r!

Well, Bob Murphy bites the bullet. I argue (in an unproductive email exchange series) that government enforcement of atmospheric property rights, while not optimal, is just as tolerable as government's enforcement of its minarchist authority (police, courts, army), such as when it detains killers. In other words, where are the outraged libertarian articles about how government police will evict someone for failure to honor a mortgage?

Well, Bob took it as a sign to show off his look-smart-to-a-sophomore-girl case for legalizing murder

So imagine we're initially in a free society, and then you hear that the government is moving in to town in order to monopolize civil society's possible responses to murderers. Are you going to feel safe to walk the streets now? Are you confident that a serial killer will be stopped as quickly as humanly possible? [emphasis added]

Right, assume the opposite of the current problem.

Bob must have missed, in any case, that I compared the carbon caps to the existence of a ban on murder, not the current enforcement methods. But no need to be rigorous when riding that bronco for all it's worth, eh?

And for anyone interested, I actually made the point Bob is responding to back in early June.

Quoting my comment at length:

...While a valid complaint, I honestly don't see how it's different from government's enforcement of other rights. Most libertarians, for example, have no problem with government enforcing (at least some of the existing) land titles, excluding murderers from interaction with the rest of us, putting out fires, etc., at least until private alternatives are [established]. The libertarian position is more like, "Hey, that would be a lot more efficient if done by privately-run organizations," rather than "Putting out fires is immoral." We should likewise view enforcement of the atmospheric property rights: yes, government will botch it horribly, but it's preferable to the tragedy of commons resulting from ZERO property rights.

But I don't see anyone here following this chain of reasoning. All I see (here and on a mailing list) is poorly thought out schemes: oh, we should give anyone a veto over any harmful emission; or we should never allow any [veto of pollution].

I'm very interested in learning where I'm wrong, but if even Bob_Murphy can't grasp basic issues like why carbon emission capacity is scarce, I'm not sure anyone here is even prepared to make the point.

***

So folks, if you want to know why I don't think Bob is taking this issue seriously, look no further than this. With one witty remark, he'll obviate about a month of discussion because of a premise assumption he never corrected when I made explicit, nor in any of the other discussion that implicitly depended on it.

His IER hit piece therefore was not really arguing, "Hey, politicians won't get the cap right because of political considerations." It was arguing:

"Government shouldn't do anything [so far so good--SB], and there's no point in even talking about why one government policy is better than another. If failure to define atmosphere rights (because politicians botch it and the free market is squelched) results in catastrophic damage to the earth's climate or even human existence ... so be it!"

I can understand why Bob had to obscure his real position for IER.

Ready to take the plunge and side with Bob? Just see if you can say this with a straight face:

How could the government continue to prosecute anything else, if people could say, "C'mon, murder is legal, and yet very few people do it. It would wreck your credit score! Who the heck wants that?!"

So why are libertarians such socialists about the atmosphere?

Why do libertarians seem to demand that there be private property, and well-defined, tradeable rights in each and every resource in existence ... except the atmosphere?

Sure, global warming alarmism could be complete B/S. Fine. But there could one day be an atmospheric global tort whose harm profile is isomorphic to that of greenhouse gas emission (as claimed by the climate science community). Shouldn't a consistent, coherent philosophy have a clear answer, directly implied from the principles its proponents claim to hold? So why does the only existing answer seem to be

NEVER, NEVER should there be private property in atmosphere, and I will do whatever it takes to rationalize why this resource should forever remain an abused, unowned tragedy.

I have the right, the inalienable right, to cheap oil, and if you thought libertarianism was supposed to be about principled, private property rights, you can just wake up from your goddamn fantasy and get with the program!

Of course, there is the the Pigou Club, whose attitude is only a bit less excusable:

Are you getting victimized by greenhouse gases? Aww, you poor thing! Hey! Polluters! Give me money! Oh, what you lookin' at me like that for? Better move to high land, bro, you ain't gettin' no bling.

EDIT: some goofs.

Setting the anti-science smear straight

(Yikes! Last post was on Thursday!)

For discussion: Why is it skeptics of climate change (either of the science or the need to do anything) who are always accused of being anti-science, when 90+% of environmentalists, are just as willing to dismiss the economic science that says, "Hey, here's the most efficient way to handle the problem", so that they can go on advocating ridiculously inefficient policies?

Bob Murphy gets scarcity wrong and won't issue a correction

A month or so ago, my perpetual foil, Bob Murphy, wrote an op-ed that I had quite few criticisms about (Mises blog a little flaky right now), but it looks like, despite what I had thought previously, Bob doesn't feel he erred. Here is the part of Bob's op-ed that I found objectionable:

Yet despite the superficial resemblance, cap and trade isn’t really a free market. The number of permits is an arbitrary scarcity imposed by government fiat. In the real market, resource prices indicate genuine scarcity. ... But if the prices of oil, coal, and other fossil fuels explode because of a cap and trade program, this won’t reflect genuine economic scarcity.... This is no more a “market price” than if the government decided to sell people permits giving them permission to sneeze.

There's no getting around this. Bob very clearly claimed that paying higher prices due to government assigning emissions rights in a case where excessive emissions hurt others, does not reflect economic scarcity. This is wrong, as I have claimed before, because -- under the assumption that all of the climate science is in order -- CO2 emissions do, in the aggregate, cause others to forgo consumption. So there's a choice: either these people get to emit CO2, or these other people get to not be flooded, not have thermohaline circulation shut down, etc. Inability for both parties to engage the consumption patterns they both want, is exactly what is meant by scarcity (though some are confused by the fact that it's a different good for each party).

Lest we think his remarks were specific to a particular poorly-run assignment of atmospheric rights (and of course Bob has totally outlined his ideas elsewhere for what would be a valid division of the atmosphere, right?), he does us the favor of comparing it to sneeze permits.

In regard to that remark, Bob responded, after I criticized him:

This may have led some readers to conclude that I was saying the very nature of the situation rendered carbon permits as illegitimate property titles, the price of which could not possibly correspond to genuine economic scarcity. However, as Silas correctly notes, if James Hansen and the guys at [RealClimate] are right, then CO2 emissions affect others just as conventional pollution does. If one agrees that one can have property rights to a clean stream etc., then in principle one could have a property right to the atmosphere and this could spawn a market in which the right to inject CO2 into this property is sold.

He then goes on to defend, irrelevantly, his claim that cap and trade "is not a market solution", a term for which he seems to use a non-standard definition and didn't define. (Bob seems to have adopted Stephan Kinsella's tactic of switching which claim he's defending so as to make his opponents' points irrelevant. If that's not what he was doing, I apologize.) But of course, such arguments don't help defend the claim under dispute, on whether higher oil prices due to permits reflect scarcity. Even if Bob can successfully support the claim that cap-and-trade "is not a market solution", that still wouldn't mean the scarcity analysis is valid.

I welcome others to read the above links, and please tell me in the comments if you think Bob's original op-ed is correct about scarcity as written, or if you don't. I think that Bob did admit it should be corrected, and even if not, he should believe so. Because even if he really was just referring to the "too few" permits case, that still wouldn't save him: issuing too few permits would just mean that the higher prices now reflect "the fact that your CO2 emissions are causing flooding in the Netherlands, not just Bangladesh" (or whatever) -- that's still a reflection of scarcity, just in favor of a different adjudication of the conflict. (Interestingly, Bob has also often worried that governments would botch such programs by -- wait for it -- issuing too many permits, which makes his unintuitive clarification of his original remark all the more unexpected.)

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!