November 14, 2012

TAX WHAT YOU DON'T WANT:

Want Less Inequality? Tax It : Revive the big idea of British economist Arthur C. Pigou! And apply it to America's most outrageous problem. (LIAM C. MALLOY AND JOHN CASE NOVEMBER 14, 2012, American Prospect)

Pigou, a key bridge figure in the history of his field, was one of the earliest classical economists to notice that markets do not always produce the best possible social outcomes. The pollution generated by a factory imposes costs on those who live downstream or in the path of its airborne emissions. The risks assumed by banks leading up to the recent financial crisis imposed costs on just about everybody. Market transactions often generate what economists call "externalities"--side effects, sometimes positive but often negative, that affect people who do not participate in the transaction.

Pigou, having recognized the problem, was the first to propose a solution. Society should tax the negative externalities and subsidize the positive ones. This simple notion--if you want less of something, tax it--is why his ideas periodically bubble up in the service of combating a recognizable cost to society, like pollution. 
Posted by at November 14, 2012 7:18 PM
  
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