Series on tax: Part seven – externalities

We are nearing the end of the tax articles – after this one there is only “inflation tax” left!  The current article is on the free lunch associated with externality taxes!

As I say at the end of the article, go here and read Eric Crampton talking about them.

My key point is that we’ve been criticising taxes for creating a “wedge” between the private and social value of a good … but what happens when that wedge exists in the first place!  What do you know, a tax can improve allocative efficiency!

However, we have to be careful not to get too seduced by this idea without thinking about it critically.  We may see a wedge when none exists, or we may exaggerate the size of the “wedge” by double counting all sorts of costs that are priced in.

Also, these types of policies can sometimes be closet ways for groups to impose their value judgements on others.  We need to make sure we are clear about this, and that the value judgments involved are transparent.  The sickening comments by some around smoking is indicative of this – I’ll be honest comparing smoking to polio makes me shiz my pants.  No matter how much you morally dislike smoking this is not cool.

If we can’t accept the heterogeniety of choice, and the fact that “pleasure” and “benefit” matter, we are going down a path I am uncomfortable with.