Chapter 11 of The Darwin Economy was dedicated to Pigouvian taxes, excise taxes or fines inposed on firms in order to curtail production. Pigouvian taxes are a winning policy, according to Frank, because society derives benefit from a reduction in the economic activities that they are imposed upon. Pigouvian taxes are a win for the goverment, too, because of the boon of new revenue that they may generate. Consumers of cigarettes and other products that are subject to the taxes would sneak out a win too, apparently, because, they will appreciate the extra nudge that helps them quit. Sounds like win-win-win policy if there ever was such a thing. But alas, there's no such thing. So how might we end up losing in all of this?
Implementation of a Pigouvian tax system is one area where we society might run into some problems. It's not supposed to be. After all, the simplicity of such a tax is one of it's supposed merits. All that is requires is to a) calculate the net social cost of a particular negative externality, b) calculate the volume of the negetive externality in terms of units of output, then c) divide a by b to obtain figure c. Figure c, in dollars, is then extracted from firms in proportion to their output. So, if man-made global warming costs society 1 billion dollars annually, and my power plant is responsible for 10% of all carbon emmisions, then I would owe the government 100 billion dollars. Assuming that my smokestack ruins the our common airspace evenly, and that the harm from lower quality air reduces all of our wealth proportionally, then a pigouvian tax on carbon combined with an even, across-the-board reduction of income taxes would result in a more just distribution and bring the market towards equallibrium. Unfortunately, those twin premises are nearly never present.
So what must we, as planners of society (or the structure thereof), determine in order to obtain a similarly just distribution and a similarly efficient market? To ensure that the revenue is distributed justly and efficiently while recognizing that some members of society, such as residents of coastal towns who are dispropotionately affected by global warming, ought to be compensated with a sum similar to the cost imposed on them, the government must then evaluate claims for damages on a case-by-case basis.
The result would be a system similar to our workman's compensation scheme. Where claimants are readily granted damages, often in cases where their claims are of dubious merit, and the payments routinely made by firms have little connection to the particular harms that they cause and mostly just reflect the average costs that the industry as a whole imposes. Ultimately, actual victims of polluters and other trangressors may end up the losers in such a system. Such a scheme, while in some cases preferable to a system where parties who were harmed are unable to seek damages, is generally inferior to a traditional tort system where affected parties seek damages for their undue harm from particular transgressors.
It is that reason I believe that class action suits of greater scope should be made possible. Individuals harmed by a particular polluter should be able band together more easily to sue entire industries for damages. However, damages should only be equal to the harm that is directly attributable to the externality, and only in proportion to the actual harm that was caused. So that, for example, if the citizens of a village have their risk of lung cancer increased 50% by a nearby factory, those who end up with lung cancer band together and sue the factory, but will only recieve damages equal to 50% of the cost that breast cancer imposed on them. Perhaps even some version of the Coase theorem can be applied, so that economic damages would be less if the villagers with cancer could have avoided it at less cost by moving. While ideal, such a change in legal structure is far away and ought to be carried out slowly and thoughtfully, with room for trial and error. Otherwise, such a regime could easily be plagued by inefficiency and frivilous suits.
Still, the commons are such that negetive externalities may, in some situations, never curtailed by tort suits and private negotiation. These are the few cases where I would favor a Pigouvian tax scheme as preferable to non-intervention. Greenhouse gas emissions and ozone-depleting aerosols are two examples of externalities that I may favor taxing in such a manner. Such cases ought to be the exception rather than the rule, because of how clumsy the scheme inevitably must be. No one can be expected to know, much less agree upon, the actual social cost imposed by carbon emmisions. This is because their are too many people affected and too many variables are at play. The best that anyone can gander is rough estimate that might take us only slightly closer to equilibrium.
The classic piece of advice for people involved in a con is, "if you don't know who the mark is, it's probably you." This is just one of the many ways that economists can remind me of criminals and charlatans, but its a big one. When we as a society are touted the benefits of a particular policy, my advice is that if we are told that everbody wins, we as a whole stand a good chance of being made worse off.
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