Pigovian Tax

A pigovian tax is a tax is a tax applied to market activity that is generating negative externalities.  This is a great term and Wikipedia has a nice overview of it – here.

Or here in this article.

A carbon tax is an example of a pigovian tax.  A pigovian tax is useful for correcting an inefficient market outcome.  For example with emissions, fossil fuel companies are not paying for the negative impacts of their emissions.  The pigovian tax, if well designed, can partially correct for the market’s failure to monetize the societal damage of the emissions.

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2 Responses to Pigovian Tax

  1. tiffany267 says:

    I’m afraid that I would disagree.

    There’s a ridiculously high tax on tobacco products, yet I’ve yet to have a job where I didn’t have to hold my breath around several colleagues who made several trips to a smoking block during the day. I still see people smoking everywhere (even the gas pump – wish I were making it up!), despite the outrageous cost and total irrationality of doing so.

    I find taxation neither effective nor moral. Do some individual and corporate practices have negative externalities? Absolutely. So there are civil courts for us to press charges if our health and/or property is adversely affected. (Of course, justice these days typically isn’t objective or grounded in individual rights, but that’s the idea anyway). With companies, my conclusion is that we should simply boycott those whose practices we don’t support. I haven’t bought anything from a “fast-food” restaurant or a Wal-Mart store in years, and no one else has to either. Let the market work, and let the money do the talking.

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  2. Enoch1680 says:

    You bring up an interesting example. My reason for posting was not to suggest that a pigovian tax was the solution to every situation where there are externalities. It was mostly because I hadn’t realized that there was a word for the class of taxes that are used to address externalities.

    To your point on morality. That gets pretty involved. Morality isn’t fungible. How do you weigh one morality against another. In other words, is it moral to irreversibly eradicate entire mountains in the Appalachians? Is it moral to continue to burn coal so that our children will be saddled with the $10’s, possibly $100’s of Trillions in damage due to climate change. If a Pigovian tax would stop those wrongs would it be worth crossing that idealistic boundary?

    I agree with you that Pigovian taxes on cigarettes have not had the degree of success many had hoped. But I don’t agree that that means it is not a useful tool to address other externalities.

    In the case of renewable energy I think a Pigovian tax would have a significant impact because unlike an addictive substance with no equivalent substitute, energy purchases are largely dictated by economics. The system does not monetize climate change and I am afraid that, unlike the case with cigarettes, suing for climate change is going to solve much. Even if you win, what company is going to be able to pay back $100 Trillion in damages.

    But it is all academic because I think a carbon tax is politically a non-starter. And for what it is worth, I think cap and trade is the best way to go anyway. But that appears to be a political non-starter as well. So when all is said and done I have added a new word to my vocabulary.

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