April 4, 2009


Pigou You, Too (Mark Gimein, 02/27/2009, Slate)

One of the centerpieces of the budget proposal that the Obama administration unveiled yesterday is an ambitious environment plan to reduce greenhouse-gas emissions. The plan—which would require the owners of big sources of carbon, such as power plants, to pay the government for each ton of CO2 and other greenhouse gases they release into the air—is something that environmentalists have wanted for a long time. It's also something a lot of economists have wanted for a while, and thus a big success for a school that has its roots in the thinking of British economist Arthur Pigou and is very much in vogue now.

A tax on carbon emissions is a form of what economists call a "Pigovian tax." (For some reason in the transition from the man to the theory, the "u" in Pigou generally gets dropped.) Such a tax imposes a cost on behaviors that have negative effects on the people around you. It accomplishes the double purpose of discouraging undesirable behavior and raising revenue to compensate for negative spillover effects. A Pigovian tax might require owners of humongous speakers to pay up when they turn up the volume or (maybe more realistically) when they buy the speakers. Cigarettes, which boost health care costs, are now taxed to subsidize those costs.

Harvard economist Gregory Mankiw, the chairman of the Council of Economic Advisers for part of George the 43rd's term, is a particular proponent who has long advocated carbon taxes—as an environmental solution. Mankiw maintains an informal list of like-minded economists and pundits called the Pigou Club [1]. By Mankiw's count, the Pigou Club includes most of the big-name economists and economic journalists in the country, which makes sense: Who doesn't like the idea of billing social troublemakers like big polluting coal plants for the costs they impose on everyone else?

With the new economic proposal, the President Obama takes a central seat in the Pigou Club. The administration's plan isn't exactly a Pigovian tax, but it's very, very close.

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Posted by Orrin Judd at April 4, 2009 6:31 AM
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