"Suppose it is a correct tax in the Pigovian sense, equal to the marginal externality on Armen. The tax increases the marginal cost of the fence and will reduce the height chosen... However, if Armen doesn’t directly receive the proceeds from the Pigovian tax and instead it goes to a general slush fund as often assumed, Armen will still want to pay Bengt to further reduce the height of the fence. After all, he is hurt by the fence. So the combination of the cost of building the fence, the Pigovian tax, and the payment from Armen push Bengt to lower the fence BELOW the optimal height."
I think I'm just missing an assumption but wanted to clarify - is it assumed that the Pigovian tax reduces the fence height but that it's still higher than the socially optimal, so Armen still wants to bargain with Bengt to get the height into inframarginal externality range? Or that the tax reduces height below 11 ft, but Armen would still bargain to get the height down to 10?
Thanks for asking for clarification. I wasn't clear. I'm saying suppose the tax is set so that, without any trading between Armen and Bengt, it would achieve the socially optimal quantity. The tax is equal to the marginal cost to Armen. It's what Pigou says. Still from there, Armen and Bengt would want to further bargain the fence down.
Is the claim clear? From there we can try to clarify the argument of why it's true.
Ah ok now I got it. I assumed this was the case because it would logically follow that the bargaining would still take place, but I wasn't 100% so had to ask. Thanks again!
How much of this is genuine insight vs a bunch of really smart ideological people trying their hardest to play down the possibility of an efficient tax? FWIW, I do agree that a Coasian solution is probably best for height building externalities - a market for air rights. But how representative is that when you think about all the externalities that abound? Carbon emissions being one big example. And even when an a Pigovian tax is imperfect, it still raises revenue and reduces a 'bad' - which you can use to reduce taxes that are even worse.
Mahalos for such great articles.
Can you help me get this part concrete?
"Suppose it is a correct tax in the Pigovian sense, equal to the marginal externality on Armen. The tax increases the marginal cost of the fence and will reduce the height chosen... However, if Armen doesn’t directly receive the proceeds from the Pigovian tax and instead it goes to a general slush fund as often assumed, Armen will still want to pay Bengt to further reduce the height of the fence. After all, he is hurt by the fence. So the combination of the cost of building the fence, the Pigovian tax, and the payment from Armen push Bengt to lower the fence BELOW the optimal height."
I think I'm just missing an assumption but wanted to clarify - is it assumed that the Pigovian tax reduces the fence height but that it's still higher than the socially optimal, so Armen still wants to bargain with Bengt to get the height into inframarginal externality range? Or that the tax reduces height below 11 ft, but Armen would still bargain to get the height down to 10?
Thanks for asking for clarification. I wasn't clear. I'm saying suppose the tax is set so that, without any trading between Armen and Bengt, it would achieve the socially optimal quantity. The tax is equal to the marginal cost to Armen. It's what Pigou says. Still from there, Armen and Bengt would want to further bargain the fence down.
Is the claim clear? From there we can try to clarify the argument of why it's true.
Ah ok now I got it. I assumed this was the case because it would logically follow that the bargaining would still take place, but I wasn't 100% so had to ask. Thanks again!
How much of this is genuine insight vs a bunch of really smart ideological people trying their hardest to play down the possibility of an efficient tax? FWIW, I do agree that a Coasian solution is probably best for height building externalities - a market for air rights. But how representative is that when you think about all the externalities that abound? Carbon emissions being one big example. And even when an a Pigovian tax is imperfect, it still raises revenue and reduces a 'bad' - which you can use to reduce taxes that are even worse.