Pigovian Research Articles

A History of Pricing Pollution (or, Why Pigouvian Taxes are Not Necessarily Pigouvian)

The standard history of modern environmental economics often views it as an application of A.C. Pigou's theory of externalities, refined over the decades and applied to environmental problems in the 1960s, when the first detailed pro-posals for pricing pollution were outlined by Allen Kneese, Thomas Crocker, John Dales, and others. However, the historical literature has noted problems with this narrative, including a 30-year gap in discussions of such applications and few actual citations to Pigou. This paper offers a simple explanation for this puzzle: Namely, pollution pricing is not (necessarily) Pigouvian. It argues that the early applied literature on the topic was rooted more in questions about common property resources and increasing returns from developing natural re-sources. Both topics were treated by broad literatures by the 1960s, including distinctly American traditions not particularly associated with Pigou. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Socially optimal lockdown and travel restrictions for fighting communicable virus including COVID-19

This paper examines the socially optimal lockdown and travel (social activity) restriction policies for communicable virus including COVID-19. In our simple model, we exploit the remarkable similarity in the structure of external costs causing market failure between the socially optimal choices of the COVID-19 pandemic case and the socially optimal urban traffic congestion level. By identifying this similarity, the results obtained from our simple model allow for future pandemic researchers to use the well-established research methodologies for designing socially optimal traffic levels and associated policy tools to find the socially optimal lockdown and travel restrictions. The key results obtained from our COVID-19 model are: (1) individuals do not internalize the external cost of infection risks they impose on others and health care system when making their own travel (social-activity) decisions; In order to induce individual travel decision makers to internalize this external cost, the government actions are necessary; The travel restrictions via lockdown or monetary penalty is one form of such actions; (2) the existence of external cost implies that the socially optimal length of lockdown is always longer than the privately optimal length of the lockdown period; (3) the strictness of the travel restriction and the amount of violation penalty should be higher in the areas with high population density and in larger cities because the external cost of spreading virus by a traveler would be higher. The monetary penalty in this model resembles the classical Pigouvian tax, which should increase with the city's population, people density, and economic prosperity; (4) when a government subsidizes or fully covers medical expenses of COVID-19 patients, stricter travel restrictions with heavier penalties are required. This is to avoid crowding out of the health care system.

Voting over selfishly optimal tax schedules: Can Pigouvian tax redistribute income?

AbstractThis paper studies pairwise majority voting over selfishly optimal nonlinear income tax schedules proposed by a continuum of individuals who differ in privately observable skills and make consumption comparisons, which creates a negative positional externality. It shows that the tax schedule preferred by the median skill type will win the voting contest. Given a reference consumption defined as the average consumption in the population, all skills face the same Pigouvian tax rate in the utilitarian optimum, whereas in selfish optima high skills face a Pigouvian tax rate larger than that facing low skills, generating a novel income redistributive effect. Under a constant elasticity of labor supply, two more results are obtained. First, for Pareto, Champernowne, Weibull, and lognormal skill distributions, the selfishly optimal tax schedule facing high (low) skills tends to be more progressive when the bottom‐skill's (top‐skill's) status concern intensifies. Second, it identifies the conditions under which, in the voting equilibrium, high skills face higher marginal tax rates while low skills face lower ones than what they face in the utilitarian optimum.

Economic and Ecological efficiency with respect to Waste Treatment Policies: Literature Review

Developed countries have undertaken far-reaching policy measures to promote recycling of municipal waste. However, the understanding of the consequences of different policy measures are often less than complete. A number of promoted waste recycling policies tend to focus entirely on environmental impacts abstracting from other important costs to society. Recycling is not a free activity. It uses resources to produce resources. Hence, it is not always definite that the marginal net product is positive. The goal of this paper is to review international literature regarding different approaches to economic and ecological efficiency related to waste treatment policies. The recycle of waste is a function of economic and non-economic influence. We consider what is meant by efficient recycling policies via examining such concepts as social optimality, cost-efficiency, non-economic efficiency in the sense of affecting behavior and eco-efficiency. Keywords: social optimality, Pareto optimum, Pigou tax, cost-efficiency, non-economic efficiency, eco-efficiency, waste DOI: 10.7176/EJBM/12-21-17 Publication date: July 31 st 2020

A cannabis pricing mistake from California to Canada: government can’t tax cannabis optimally

ABSTRACT We apply a simple three good general equilibrium model to examine the optimality of a Pigouvian tax on a legal cannabis market which faces competition from a well-established illicit market. Despite the widespread support for Pigouvian taxes on cannabis, the availability of untaxed illicit cannabis with comparable costs and higher externalities renders taxation of legal cannabis suboptimal. Our results, derived from a relatively simple model, show that the welfare improving properties of a Pigouvian tax can be undermined by illicit market competition. Based on this simple analysis, we conclude that it is impossible for the pricing policies implemented in multiple jurisdictions (including California and Canada) to achieve the optimal, welfare maximizing outcome.

Emission Regulation of Markets with Sluggish Supply Structures

I examine regulation in the presence of convex investment costs and technology specific capacity stocks. Announcement of future emission taxes reduces current emissions unless fossil fuels are scarce, in which case the effect is ambiguous. Substantial future emission reductions require action today, because it takes time to build up clean production capacity and phase out dirty capacity. The Pigou tax must be coupled with sector specific investment taxes or subsidies to induce the socially optimal trajectory if the private discount rate differs from the social discount rate. If such investment taxes or subsidies are unavailable, a (time-inconsistent) second-best alternative may be to tax emissions above the Pigouvian level during the transition phase. The theory is complemented with a stylized numerical model of the US electricity market.

The effectiveness of EC policies to move freight from road to rail: Evidence from CEE grain markets

The European Commission adopted in 1991 a policy of encouraging the substitution of motor carrier haulage of freight with rail and water carrier haulage, as part of its “green” agenda of reducing fuel consumption, emission of pollutants, carbon intensity, and road congestion. Regarding railway freight in particular, one policy tool that the Commission has emphasized for this purpose is the restructuring of the rail sectors of member countries through the creation of competition for the incumbents by new train-operating companies (TOC's) – seemingly a less obvious policy choice than alternatives such as Pigouvian taxation measures or infrastructure subsidies. This paper focuses on one important commodity group – grain – in three EC member states and one non-member state – Poland, the Czech Republic, Slovakia, and Ukraine – to examine what appear to be the binding constraints to increases in rail's share. Such constraints seem more closely related to shortages in infrastructure capacity than to a lack of competition among TOC's. Our findings suggest that a policy focused more directly on infrastructure investment – whether an increase in subsidies or alternative strategies for attracting private investment into infrastructure, including alternative reform models – will be required if the current constraints binding rail's share are to be relaxed.

Markets for Goods with Externalities

I consider the welfare and profit maximization problems in markets with externalities. I show that when externalities depend generally on allocation, a Pigouvian tax is often suboptimal. Instead, the optimal mechanism has a simple form: a finite menu of rationing options with corresponding prices. I derive sufficient conditions for a single price to be optimal. I show that a monopolist may ration less relative to a social planner when externalities are present, in contrast to the standard intuition that non-competitive pricing is indicative of market power. My characterization of optimal mechanisms uses a new methodological tool—the constrained maximum principle—which leverages the combined mathematical theorems of Bauer (1958) and Szapiel (1975). This tool generalizes the concavification technique of Aumann and Maschler (1995) and Kamenica and Gentzkow (2011), and has broad applications in economics.

How regulatory measures towards biobased packaging influence the strategic behaviour of the retail industry: A microempirical study

Germany set a new record in waste production in 2017 and thus occupies one of the top ranks in the EU in terms of garbage creation. However, whether and how much of the waste can be recycled at all depends strongly on the material and its properties, whereby the recycling rate for plastics is still moderate. Environmental damage from plastic packaging can be avoided by using biobased substitute materials. To achieve this, the costs for plastic must first be increased in order to make these alternatives attractive in terms of price. This paper reports on a study dealing with regulatory measures to mitigate the waste problem from an economic point of view. It discusses the results of a choice-based experiment with 253 industrial decision-makers from the German Food and Technics retail segment. Regulatory scenarios, such as Pigou tax on plastic packaging or product labelling about environmental impact, were specified as a means to avoid market failure, and the attitude of the respondents were measured. The data analysis showed that the additional costs of switching to biomaterials are more likely to be passed on to the market by SMEs (100%) in the form of price increases (p = .01; phi = .28) and that quality reductions tend to be considered by the food industry (p < .05; phi = .39). Hence, large companies (65.2%) and the Technical goods traders (35.7%) showed a tendency to be prepared to bear part of the change costs. The packaging weight was favoured by the majority as the basis for taxation (>48%), and it was proposed to indicate the packing's CO2-emissions using a traffic light scheme (>47%). Finally, it was found that trading companies in general had only a small influence on the packaging properties of their suppliers' products (<32%). From this it can be concluded that impulses for plastic avoidance should rather be set by government regulatory instruments than by self-regulation on the part of the retail industry, which, however, with an average of 30% plastic recycling in packaging, is already making a significant contribution to avoidance. Finally, it is recommended that economic explanatory models should integrate the variables Company Size and Product Category for reliable economic predictions.

Self‐Dealing Sanctions: Pigouvian Taxes?

I am indebted to law professor Ellen Aprill for introduction (for me, anyway) to the notion of the Pigouvian tax, by means of a paper she recently published concerning the character of the private foundation self‐dealing sanctions. (The paper is to be an article in the Pittsburgh Tax Review.) Not well‐schooled in economic theory, I am part of the group she describes when writing that “many have been exposed to the idea of a Pigouvian tax without knowing the term.”

Klaus Mathis, Bruce R. Huber, Energy Law and Economics

When the elements of ‘law’ and ‘economics’ come into play in the field of energy, there are a range of regulatory instruments available to create and maintain more sustainable societies such as: command and control regulations, restraints, Pigovian taxes, emission certificates and nudging policies. A series of questions needs to be considered further: ‘to what extent is it justifiable to rely on markets and continued technological innovation, especially in relation to the present exploitation of scarce resources? To what extent is it necessary for states to intervene in energy markets? Do neoclassical and behavioural economics provide us with a framework capable of predicting the market’s complex reactions to energy policy?’ This book addresses the above questions in both the theoretical and practical aspects of energy law. Part I, entitled, ‘Energy Transition’, including six papers. It is noted that, there are three main strategies currently discussed in literature for achieving sustainability,...

Avoiding Sovereign Default Contagion: A Normative Analysis

Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower&amp;amp;amp;amp;amp;amp;#x27;s policies can be replicated in a decentralized setting with Pigouvian taxes on debt.

Toward Optimal Meat Consumption

External cost from meat consumption raises an issue of possible government mechanisms toward mitigation. Economic theory provides a framework for determining the optimal set of mechanisms considering the associated benefits and costs. Such a theoretical development rests on consumers' responsiveness to alternative mechanisms. Considering two mechanisms, a Pigouvian tax and green‐label education, yields tandem theoretical optimal government mechanisms. Populating this theoretical model with empirically derived elasticities and other parameters provides an application. Results indicate education alone will likely not yield a high social‐optimal level of mitigation. Instead, if external costs warrant government mechanisms, a Pigouvian tax will be required to move consumption toward a socially optimal state.

Shared social responsibility. Dual role of consumers as stakeholders in firm strategy

Purpose The purpose of this paper is to model the role that stakeholders, and especially social responsible consumers play in the process of finding a win–win solution to control production related negative externalities. In this regard, when information asymmetries are present and consumers become knowledgeable about them, consumers with d-preferences for corporate social responsibility (CSR) type of products becomes the driver of the firm strategy. Design/methodology/approach To accomplish the goals of this paper, the authors proceed to develop a series of theoretical models wherein the social gains and costs of alternative modes of intervention are illustrated. The authors begin with a standard Pigouvian tax model and construct a stakeholder equivalent tax model and finalize the analysis with consumers acting in a shared social responsible behavior with firms as the optimal solution model. Findings The authors show that proactive disclosure of information asymmetries regarding negative externalities develops a shared social responsibility between consumers and firms. Market-based solutions to the externality problem are achieved under this setting. This solution is preferred to a Pigouvian tax and to a stakeholder equivalent tax. It is concluded that shared social responsibility is the result of the interaction of consumers with d-preferences and the reaction of a socially responsible “firm” willing, and the authors are able to incorporate these preferences as drivers for its strategy. Research limitations/implications The main limitation of this paper is in its theoretical nature and specific applications to one case, that of negative externalities in production processes. The implication of this is that the model herein developed needs to be put to the empirical test. Social implications The overall social implications indicate that active reduction of information asymmetries is welfare improving and preferred to government intervention. Originality/value This paper is original as it makes use of economic principles to develop a parsimonious model to demonstrate that proactive actions of a firm in response to consumers and stakeholders demands leads to an overall social welfare improvement when negative externalities deriving from production are incorporated into the decision making process of both consumers and firms. These decisions prove superior to government regulations.

Multinational Banks and Financial Stability

We study the scope for international cooperation in macroprudential policies. Multinational banks contribute to and are affected by fire sales in countries they operate in. National governments setting quantity regulations non-cooperatively fail to achieve the globally efficient outcome, under-regulating domestic banks and over-regulating foreign banks. Surprisingly, non-cooperative national governments using Pigouvian taxation can achieve the global optimum. Intuitively, this occurs because governments internalize the business value of foreign banks through the tax revenue collected. Our theory provides a unified framework to think about international bank regulations and yields concrete insights with the potential to improve on the current policy stance.

The Pigouvian Constitution

How can lawmakers reduce the skyrocketing rate of gun death in the United States? How can they stymie the spread of viral fake news stories designed to undermine our elections? Certain constitutionally-protected activities—like owning a gun or speaking online—can generate social harms. Yet when lawmakers enact regulations to reduce those harms, they are regularly struck down as unconstitutional. Indeed, it is the very laws designed to most aggressively reduce social harms—like total criminal bans—that are the least likely to be upheld. As a result, regulators appear stuck with an unpleasant choice—regulate constitutionally or effectively, but not both. This article proposes a novel solution: Pigouvian taxation. A Pigouvian tax is an economic tool whereby people are required to bear the social costs of their own activity, rather than forcing others to do so. In important cases, Pigouvian taxes can thread the needle that traditional regulations have not, reducing serious social costs while respecting constitutional protections of individual rights. This is because many constitutional tests—for example, strict scrutiny’s “narrow tailoring” requirement—implicitly reflect the very kind of economic thinking on which Pigouvian taxes rely. In short, constitutional doctrines protecting individual activity do not require society to implicitly subsidize such activity by absorbing any and all costs it generates. Legitimate social costs may be regulated. But regulations must maintain a careful proportionality between the constitutional burdens they impose and the social harms they seek to eliminate. Pigouvian taxes, unlike traditional command-and-control rules, are inherently well-suited to such tailoring. Thus, in areas—like guns and speech—where traditional rules have been difficult or impossible to adequately tailor, Pigouvian taxation presents an important new regulatory tool.

A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects

The matching grant (the Pigovian tax) program from a central government to the jurisdictional governments is a strong instrument to solve the problem of an insufficiently provision of local public goods. The under-provision (over-provision) of public goods arises from different kinds of externalities, such as the benefit spillovers and the tax-exporting effect. This study introduces the spillover effect of public goods and the heterogeneity of jurisdictions to the capital tax competition literature using a two-period economy. It is assumed that the central government and the jurisdictional governments play a Stackelberg game with centralised leadership and that there is a unique Stackelberg equilibrium in each period. Meanwhile, the central government and the jurisdictional governments are assumed to be hyperopic and benevolent. A clear result is that the revision of a corrective device used by the central government in the first period to ensure an optimal level of a local public good which is provided by a hyperopic jurisdictional government, significantly depends on the relative size of the income and spill-in effects in the second period. When the income effect is larger than the spill-in effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be increased (decreased). Conversely, when the spill-in effect is larger than the income effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be decreased (increased). The relative size of the two effects, which work in opposite directions, is determined by the tastes and endowments of the jurisdictions, the form of their production functions and the degree of spillovers, among other factors. This result is quite different from the literature.

Is It Possible for Pigou Tax and Coase Scheme Working Together? A New Externality Elimination Framework from Relation and Network Perspective

The extensive use of traditional fossil energy will produce huge environmental or health negative externalities. When it refers to the case of Private Passenger Vehicle (PPV), it exhausts a large amount of air pollutants, which will cause serious health damage to people. Based on the relation and network perspective, examining the traditional externality elimination mechanism-Pigou Tax and Coase scheme, can better summarize their advantages and disadvantages, and propose a new externality elimination framework accordingly. The research poses a new externality elimination framework that combines the advantages of them. It can not only realize the compensation for the health damaged under the Pigou tax, but also make full use of the market disclosure advantage of the Coase scheme for infringement preferences. The research first explains the framework of externality elimination based on relation and network perspective, and reveals that the essence of externality elimination is to change the asymmetric relation of interests into a symmetrical one. Then the study explains the property rights and pollution rights in the Coase scheme also based on relation and network perspective, and believes that property rights are to ensure no externality. Finally, using the social welfare maximization model, the Coase scheme pollution authority amount is included in the indirect utility objective function of a gasoline or new energy vehicle throughout its life cycle, and then the overall social welfare expected to purchase a car is investigated, in order to obtain the substitution relationship between the amount of authority and the amount of compensation, which plays a key role of the new externality elimination framework.

Economics Like a Living

An introductory SWOT-analysis of economic growth by neoliberalist economics concludes that within a few decennia the success of neoliberalism has turned upside-down with more severe threats to humanity whereof that of the greenhouse effect has top-priority. The bioecological approach—approaching economics as an encapsulated discipline between ecology and brain science—identifies a Pigovian carbon emission tax (CET) as most effective towards the top-priority threat to humanity that of the green-house effect. However, in the short-term, the democratic center coalitions are too weak to implement CET, due asymmetric levels of economic knowledge between the profession of economists and the public. An accelerated public dissemination of bioecological economics is crucial to provide the option of political implementation of CET.

Kantians Defy the Economists’ Mantra of Uniform Pigovian Emissions Taxes

This paper analyzes the efficient emissions taxation in economies with individuals who are morally motivated to reduce their emissions footprint. They are heterogenous with respect to their morality and their consumption preferences. We distinguish between the concepts of moral and conventional utilitarian (= material) welfare. The materially efficient tax rates turn out to be consumer-type specific; they are smaller than the Pigovian tax rate; and the smaller, the higher the individuals’ propensity to act morally. Finally, we briefly characterize the second-best uniform emissions tax.