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Can You Impose an Externality on Yourself?

Thursday March 18, 2010

Garth Brazelton thinks so, in an argument I find somewhat persuasive:


My issue is that he keeps saying 'sin taxes' are not Pigovian. I've disagreed on this point, and I disagree continually. A basic definition of a Pigovian tax is: a tax levied on a particular behavior in the market that is generating negative externalities. The idea is the tax re-aligns the real social cost with the benefits of the activity. Mankiw distorts this defintion and implies that negative externalities can only occur as an action by one group negatively affects another... The externality is there - it's not external of self at that time, it's external of self OVER time. It's correcting behavior that, if a person had complete foresight and 20/20 clarity of the totality of their life, one likely would do less of. ...And this is ignoring the very real argument that many 'sins' DO have real negative external consequences at a given point in time - consequences on family and relationships that, while often non-pecuniary, cannot be ignored.

I have never thought of it that way before, but hyperbolic discounting and other forms of time-inconsistent preferences may be a form of externality. Can today's self impose a burden on tomorrow's self by drinking too much beer? And does that burden constitute an externality?

I wonder if branding such behavior an 'externality' is beside the point. If imposing these sin taxes is welfare improving, does it really matter if we use the externality label?

Raising Revenue Through a VAT

Tuesday March 9, 2010
I am a supporter of the VAT, so I was interested in reading Veronique de Rugy's anti-VAT piece The Wrong Policy at the Wrong Time. I was surprised to find that there were two sentences I was in complete agreement with:
Which suggests a final thought: Focusing on revenue mechanisms such as a VAT in deficit-reduction discussions misses the point that spending and revenue tend to be very loosely correlated. Governments spend when don't have revenue and they spend when they do have revenue.
That sounds an awful lot like my anti-'Starve the Beast' argument from Will Higher Taxes on Gasoline Lead to Higher Government Spending?

How Much Does Public Policy Contribute to Long-Term Unemployment?

Friday February 26, 2010
Arnold Kling quotes from a terrific piece by Eric S. Raymond:
We've spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker -- which meant the minimum revenue-per-employee threshold below which hiring doesn't make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it's not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can't pull enough weight to justify a paycheck; it's the marginal ones, the mediocre, and the mildly dysfunctional.
As a small business owner with a number of employees, I agree wholeheartedly with this. The expense of hiring and retaining a worker goes beyond wages and include training costs, employer-side payroll taxes, health insurance and many other items. Some of those (though not all) are direct functions of government regulation (payroll taxes and the minimum wage for low-wage jobs).

If a country really wants to reduce unemployment, the best solution would be to find ways of reducing the costs of employing workers. Eliminating employer-side payroll taxes would be a good start; the revenue can be made up through increased use of value added sales taxes. Swapping the minimum wage for a negative income tax would also increase employment and promote economic efficiency. The Second Welfare Theorem illustrates that altering the market price of a good (such as a price floor on labor) will necessarily lead to inefficiency. We can better achieve the outcome society wants through a straight wealth transfer, such as a negative income tax.

Oil and Ingenuity

Thursday February 25, 2010
Five years later, We Will Never Run Out of Oil is still one of my most read articles and the source of the majority of the angry e-mails I get. I wonder how many Prof. Boudreaux will receive for For oil, tap ingenuity. I particularly enjoyed this part:
Human creativity and effort also are at work finding not only substitutes for oil, but also new supplies of oil. Each success on this front increases the supply of oil. The reason is that oil deposits that remain unknown are economically nonexistent.

The same is true of oil deposits that are known to exist but are currently too costly to tap. Oil in the Earth's crust that is out of reach with existing technology is no more of a resource today than is oil on Pluto. But if and when human creativity discovers cost-effective techniques for extracting that oil, it then -- and only then -- becomes a resource. In effect, more of the resource "oil" is created.

Of course, as a matter of physics, there is indeed only a finite amount of oil in the Earth. But we have no idea how much. And our ignorance of this physical fact is economically relevant.
For a longer version of this argument, see: We Will Never Run Out of Oil.
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