In the real world, the "producer" category is not a monolith. Certain businesses actively lobby for Pigouvian taxes to gain a competitive edge:
Firms that already utilize clean energy or sustainable methods will push for carbon or pollution taxes. The tax artificially raises the costs of their dirty-tech competitors, driving those rivals out of business.
Massive corporations sometimes weaponize Pigouvian taxes as a barrier to entry. A large firm can absorb the compliance and administrative costs of the tax, while smaller startups cannot and are forced to close.
Yes, I think this is part of the main point we have really been trying to drive home with all of our posts about externalities. They seem extremely straightforward and easy to correct. Social cost greater than private cost? Tax it. Problem solved! Sounds simple. However, things aren't that simple.
There are measurement issues. Can we properly identify the appropriate magnitude for the tax? There are issues related to public choice and political economy. What happens if the revenue-maximizing tax rate is higher than the Pigouvian tax rate? How do we know politicians won't exploit the logic behind the tax to raise more revenue without generating the efficient outcome? There are issues associated with bargaining and cooperation costs. What is efficient might not be Pareto optimal. How do we ensure that firms don't try to exploit the tax to their advantage? There are welfare-related issues. Just because the tax internalizes the cost doesn't mean that it yields a Pareto improvement.
There are so many things to think about, but many of them are often left out of the conversation.
I think the key lesson from Coase, Ostrom, and others is that often times we don't need government intervention. People negotiate. People form voluntary organizations, both formal and informal. These don't always lead to the optimal outcome from the textbook, but they are often the best that we can do.
In the real world, the "producer" category is not a monolith. Certain businesses actively lobby for Pigouvian taxes to gain a competitive edge:
Firms that already utilize clean energy or sustainable methods will push for carbon or pollution taxes. The tax artificially raises the costs of their dirty-tech competitors, driving those rivals out of business.
Massive corporations sometimes weaponize Pigouvian taxes as a barrier to entry. A large firm can absorb the compliance and administrative costs of the tax, while smaller startups cannot and are forced to close.
Yes, I think this is part of the main point we have really been trying to drive home with all of our posts about externalities. They seem extremely straightforward and easy to correct. Social cost greater than private cost? Tax it. Problem solved! Sounds simple. However, things aren't that simple.
There are measurement issues. Can we properly identify the appropriate magnitude for the tax? There are issues related to public choice and political economy. What happens if the revenue-maximizing tax rate is higher than the Pigouvian tax rate? How do we know politicians won't exploit the logic behind the tax to raise more revenue without generating the efficient outcome? There are issues associated with bargaining and cooperation costs. What is efficient might not be Pareto optimal. How do we ensure that firms don't try to exploit the tax to their advantage? There are welfare-related issues. Just because the tax internalizes the cost doesn't mean that it yields a Pareto improvement.
There are so many things to think about, but many of them are often left out of the conversation.
Would you be satisfied with leaving it to the free market?
I think the key lesson from Coase, Ostrom, and others is that often times we don't need government intervention. People negotiate. People form voluntary organizations, both formal and informal. These don't always lead to the optimal outcome from the textbook, but they are often the best that we can do.
Amen to that!
So the answer is always transaction costs.