Abstract
The year 2020 marks the centennial of the publication of Arthur Cecil Pigou’s magnum opus The Economics of Welfare. Pigou’s pricing principles have had an enduring influence on the academic debate, with a widespread consensus having emerged among economists that Pigouvian taxes or subsidies are theoretically desirable, but politically infeasible. In this article, we revisit Pigou’s contribution and argue that this consensus is somewhat spurious, particularly in two ways: (1) Economists are too quick to ignore the theoretical problems and subtleties that Pigouvian pricing still faces; (2) The wholesale skepticism concerning the political viability of Pigouvian pricing is at odds with its recent practical achievements. These two points are made by, first, outlining the theoretical and political challenges that include uncertainty about the social cost of carbon, the unclear relationship between the cost–benefit and cost-effectiveness approaches, distributional concerns, fragmented ministerial responsibilities, an unstable tax base, commitment problems, lack of acceptance and trust between government and citizens as well as incomplete international cooperation. Secondly, we discuss the recent political success of Pigouvian pricing, as evidenced by the German government’s 2019 climate policy reform and the EU’s Green Deal. We conclude by presenting a research agenda for addressing the remaining barriers that need to be overcome to make Pigouvian pricing a common political practice.
Highlights
2020 marks the centennial of the publication of Arthur Cecil Pigou’s magnum opus The Economics of Welfare
Impact assessments of social costs and benefits of policy proposals, the latter have rarely resulted in taxes that conform to Pigouvian pricing principles
The preceding shows why policy-makers tend to have little trust that carbon prices induce dynamically efficient investment and innovation decisions. This is supported by the skeptical reasoning of environmentalists or non-economic scientists that carbon pricing is good at harvesting the currently low-hanging fruits to mitigate emissions, but may not enable plantation of fruit trees for future harvest (Rosenbloom et al 2020)
Summary
2020 marks the centennial of the publication of Arthur Cecil Pigou’s magnum opus The Economics of Welfare. Examples are different forms of heterogeneity combined with imperfect information, leakage effects due to jurisdictional spillovers, market concentration, innovation market failures, etc In these settings, the fundamental research question is often whether the optimal environmental tax deviates from the ‘Pigouvian level’—and in what direction (Aronsson and Sjögren 2018; Cremer et al 2003; Jacobs and De Mooij 2015; Jacobs and van der Ploeg 2019; Parry 1995; Requate 2005a, 2005b; Van der Ploeg 2016). Impact assessments of social costs and benefits of policy proposals, the latter have rarely resulted in taxes that conform to Pigouvian pricing principles Instead, these assessments, more often than not, merely rationalize other environmental policies, such as fuel efficiency standards. We conclude (Sect. 5) with some reflections on the legacy of Pigou’s work for contemporary economic policy
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