Our text today is the 4th edition of Arthur Cecil Pigou’s Economics of Welfare, which laid the foundations for carbon taxes and other taxes on externalities—harms caused by economic production. We have empirical evidence that carbon taxes work to reduce fossil fuel burning and thus Global Warming, and could do much more given sufficient political will.
Research shows that carbon taxes effectively reduce greenhouse gas emissions. Most economists assert that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse economic effects.
That would, of course, have to include dropping all subsidies for fossil fuel extraction and burning, and for their use in other industries such as steel, ammonia, and cement.
Pigou's most enduring contribution was The Economics of Welfare, 1920, in which he introduced the concept of externality and the idea that externality problems could be corrected by the imposition of a Pigovian tax (also spelled "Pigouvian tax"). In The Economics of Welfare (initially called Wealth and Welfare), Pigou developed Marshall’s concept of externality, which is a cost imposed or benefit conferred on others that is not accounted for by the person who creates these costs or benefits. Pigou argued that negative externalities (costs imposed) should be offset by a tax, while positive externalities should be offset by a subsidy. The externality concept remains central to modern welfare economics and particularly to environmental economics. The Pigou Club, named in his honour, is an association of modern economists who support the idea of a carbon tax to address the problem of climate change.
Pigou used different terminology, writing of marginal social net product rather than externalities.
We have next to distinguish precisely between the two varieties of marginal net product which I have named respectively social and private. The marginal social net product is the total net product of physical things or objective services due to the marginal increment of resources in any given use or place, no matter to whom any part of this product may accrue. It might happen, for example, as will be explained more fully in a later chapter, that costs are thrown upon people not directly concerned.
See poisonous “medicines”, tainted food, the Dust Bowl, lead, acid rain, DDT, tobacco, mountaintop removal strip mining, and many more such episodes, and especially Global Warming.
Pigou was also in favor of “a national minimum standard of real income”, an idea which we have seen from Milton Friedman, as a Negative Income Tax. This is an idea whose time has come, as I have written about elsewhere, and will again.
When complete equality among the values of marginal social net products is wanting, a diminution in the degree of inequality that exists among them is likely to benefit the national dividend.
Translation: When some enterprise produces negative externalities, reducing them, by taxes or other means, increases GDP and human welfare.
Some arrangements will produce relative maxima, at points higher than the neighboring ones, but there must be an absolute maximum. Therefore, as to subsidies,
Benefit might be secured by a temporary bounty (or temporary protection) so arranged as to jerk the industrial system out of its present poise at a position of relative maximum, and induce it to settle down again at the position of absolute maximum—the highest hill- top of all. This is the analytical basis of the argument for the temporary protection, or other encouragement, of infant industries; and, if the right infants are selected, the right amount of protection accorded, and this protection removed again at the right time, the argument is perfectly valid.
All experience has shown, however, the strong, indeed vehement tendency for such subsidies and price supports to become permanent, as with sugar, corn ethanol, and fossil fuels. This is not necessarily the case, but requires strong political will to avoid.
It follows that, if private and social net products everywhere coincide, the free play of self-interest, so far as it is not hampered by ignorance, will tend to bring about such a distribution of resources among different uses and places as will raise the national dividend and, with it, the sum of economic welfare to a maximum.
True, but again all experience has shown that doctrinaire laissez-faire always fails, because those conditions do not obtain in the presence of patents and other instruments of monopoly, and in the presence of vast financial and economic ignorance, enforced by law, custom, and politics, plus deliberate corporate disinformation campaigns. Friedmanites, among others, are impervious to such evidence, so it is a good thing that Friedmanite Voodoo Economics is no longer dominant, and we can usefully have this discussion in the current state of our politics. It is no longer excusable for so much of industry to ignore the profitability of lower-cost renewable energy and storage everywhere in the world.
Bidenomics, in particular, intends to push the economy forward with temporary measures, in the hope that they can be abandoned when they outlive their usefulness. We do need permanent investment programs for infrastructure, which is always in danger of wearing out, but we can expect that solar panel and chip manufacturing will become self-sustaining, and consider what else we might do to make that happen without risking them becoming economic parasites.
A Biden victory in 2024, coupled with Democratic control of both Houses of Congress without any dependence such obstructionists as Joe Manchin, would mean that we could go much farther in dismantling wasteful subsidies, taxing carbon and other pollution, and promoting even more useful innovations in 2025.
But now we come to the point.
Incidental uncharged disservices are rendered to third parties ... when the owner of a site in a residential quarter of a city builds a factory there and so destroys a great part of the amenities of the neighbouring site.
And the same goes for the whole planet we live on.
Perhaps, however, the crowning illustration of this order of excess of private over social net product is afforded by the work done by women in factories, particularly during the periods immediately preceding and succeeding confinement [giving birth, and health problems around it]; for there can be no doubt that this work often carries with it, besides the earnings of the women themselves, grave injury to the health of their children.
Fossils Fools demand that the value of their past investments be protected. This is now known as the Sunk Costs Fallacy.
At this point it is desirable to call attention to a somewhat specious fallacy. Some writers...have imagined that, when improved methods of producing some commodities are introduced, the value of the marginal social net product of the resources invested in developing these methods is less than the value of the marginal private net product, because there is not included in the latter any allowance for the depreciation which the improvement causes in the value of existing plant.
The commodities that particularly concern us here are electricity and electric vehicles. The argument would be that Tesla must pay a tax to compensate Ford and the others for cutting into the ICE car market. Arrant nonsense, of course, but the sort of thing that some politicians persuade themselves of when accompanied by lavish campaign contributions.
Pigou gave examples of taxing alcoholic beverages to reduce the social ills of drunkenness and alcoholism, and the cost of washing clothing in towns with heavy coal smoke pollution. He did not develop any detailed theory of the effects of taxing these externalities, but simply bringing up the idea led to a vast development of the theory by others, down to the present, and of the gathering of relevant data. I have included a list of references on carbon taxes below.
The conclusion is inescapable, except to those deluded by greed.
Why the US should establish a carbon price either through reconciliation or other legislation
In considering how the U.S. can meet the targets set out by Biden, one fact becomes clear: the U.S. needs a carbon price.