Our friend Greg Mankiw has been promoting his Pigou Club for some time. And while I may be willing to sign up for Pigouvian taxes for producers that emit a large amount of greenhouse gases, I am not sold on higher gasoline taxes for individuals.
Mankiw’s hypothesis is that if we institute a Pigouvian tax on gasoline, it will lead to lower gasoline consumption. Perhaps this is possible in aggregate, but I am not sure that it would be the panacea that Mankiw makes it out to be.
Individuals respond to incentives. So, if a tax is placed on a good, individuals will be inclined to change their behavior. Pigouvian taxes work especially well on things like cigarettes and alcohol. The increased taxes cause many to cut down on their unhealthly habits; or even quit. However, there is something quite different between tobacco use and automobile use.
Most people use their cars to drive to work, the store, and to see friends and family. If the tax on gasoline was raised, Mankiw argues, individuals would consume less. However, individuals would still have to go to work, pick up the groceries, and presumably visit with family. Thus there would be little wiggle room for reducing consumption.
In addition, substitutes are in short supply. Those who live in cities like New York and Chicago may be able to take some sort of public transportation, but what about those who live in the suburbs? Suburbanites, in general, would be disproportionately hit with the tax. In effect, the tax would penalize individuals based on their proximity to work.
Carpooling is a possible option, but for many workers. There are unseen costs associated with carpooling; the passenger is at the mercy of the driver and his schedule. In addition, carpooling is not an option for many in large metropolitan areas where co-workers are relatively spread out.
Further, many drivers are locked into contracts — whether it be through a lease or some sort of financing. Therefore there would be a high cost for individuals to switch to a more fuel efficient vehicles. In the short run, we would see very little shifting to more fuel efficient vehicles and those who are locked into the contracts would begin paying a high price immediately.
In addition, transportation companies would see the costs of operation skyrocket. This cost would not simply be absorbed. Instead, the cost would be past along to wholesalers and retailers and thus to consumers.
Mankiw has also dabbled in philosophical fallacy:
Some of my libertarian friends aren’t members of the Pigou Club because they view gasoline taxes as a case of excessively intrusive government. But if this tangle of regulation is the alternative, isn’t it time for them to reconsider?
Mankiw’s false dilemma assumes that there are only two solutions: regulation or pigouvian taxes. Regulation is bad and thus his idea is good.
The Pigou Club purports to solve our energy problems by taxing fuel consumption. However, driving is not simply a bad habit like smoking a cigarette. Many would be unable to reduce their gas consumption by a significant amount. The tax would be especially hard on the transportation sector and thus would carry over into many consumer goods.
Pigouvian taxes are designed to correct for externalities. A pigouvian tax on gasoline, however, would be riddled with its own negative consequences. The tax assumes that individuals have a greater ability to reduce consumption than is actually the case.
The tax is a bad idea. Enough is enough.
Russ Roberts weighs in on much more philosophical grounds:
Shouldn’t we support having government encourage (not force) people to make better decisions if without that encouragement people will make bad decisions? My answer is no. I don’t expect pigs to fly. Why should I expect government to be good at helping people make good decisions?
It would be naive to argue that we shouldn’t worry about pollution because people will feel guilty polluting and that will discourage pollution. Similarly, it strikes me as naive to encourage government to solve the pollution problem via a gasoline tax if you know that the level of the tax will be set wrong and that the money will be badly spent.
But advocating a gas tax simply because driving produces externalities is a move in the wrong direction.