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Monday, March 15, 2010

Mankiw Doesn't Fully Understand Pigovian Taxation

I hate to pick on Prof. Mankiw some more, but last week he lambasted the 'liberal' NPR, which happens to be my favorite news source, radio station - it is just all around awesome. So, now he gets what's coming to him.

My issue is that he keeps saying 'sin taxes' are not Pigovian. I've disagreed on this point, and I disagree continually. A basic definition of a Pigovian tax is: a tax levied on a particular behavior in the market that is generating negative externalities. The idea is the tax re-aligns the real social cost with the benefits of the activity. Mankiw distorts this defintion and implies that negative externalities can only occur as an action by one group negatively affects another. Of course, this is ridiculous because behavioral studies show that, in reality, people do not always behave in a manner that is temporally beneficial. IE., people are short-sighted. So, a sin tax is not just the State imposing morals, it is helping people help their (future) selves. Just because there aren't always bystanders for eating bad foods for example, doesn't mean there is no externality. The externality is there - it's not external of self at that time, it's external of self OVER time. It's correcting behavior that, if a person had complete foresight and 20/20 clarity of the totality of their life, one likely would do less of. ...And this is ignoring the very real argument that many 'sins' DO have real negative external consequences at a given point in time - consequences on family and relationships that, while often non-pecuniary, cannot be ignored.

Mainstream economics has had a history of ignore the implications of time and behavior - and Mankiw promotes this problem. One can legitimately argue whether these tax systems should be imposed, but regardless of how you define it, it's a system that by necessity is a market intervention that involves some amount of judgement absent the ability to EVER fully measure the degree of negative externality.

27 comments:

The most improved said...

Bingo! we are all subjected to bouts of irrationality. You'd have to say we never do things we regret (as we'd have factored in the long term consequences) to argue otherwise. IMO Mainstream economics has something fundamentally human missing from many of their models.

Anonymous said...

We are also subjected to following the heard and group think. Economists believe they are in a world all to themselves, when in actuality, economics is the method of understanding comparative political advantage. This is the fundamental element missing in modern-day economics.

Danny L. McDaniel
Lafayette, Indiana

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Mainstream economics has too much Keynes thought. Time to let the market "adjust" without govt social engineering. It has certainly put it to this point in the 1st place.

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