Enough is Enough

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.

UPDATE:

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.

4 responses to “Enough is Enough

  1. Superb post, Josh.

    I have great respect for Dr. Mankiw, but I completely disagree with the Pigouvians. The Pigou Club that he links to is concerned only with Global Warming. I suppose if you are certain of anthropogenic global warming, such government intrusion might be a remedy. For Mankiw to accept something so anti-freedom just because it would be nice to conserve more loses me.

  2. tax gasoline to raise the price to 5 bucks a gallon and allow a 500 gallon tax credit…at 20 mpg ,that is a 10 thousand mile limit..do more ,suffer
    when gas went to 3 bucks a gallon demand fell 14 percent

  3. Pingback: Pigou Club » Pigou Club Debunked » Blog Archive

  4. Interesting argument, but I think you overlook or downplay many aspects. Sure, most suburbanites find it inconvenient to carpool, but if you did it once per week with a neighbor, you’d each cut your mileage 10%. And one day every 2 weeks you’d iach have to adjust to somebody else’s schedule – that doesn’t sound too onerous. And suburbanites (of which I am one) are notoriously ineffecient running errands, etc. that higher gas prices could cause some focus and easily cut back on mileage that way. For example, have you been to a public school lately ? Parents waiting in line for 10 to 15 minutes to drop kids off at the front door, while half empty buses also try to get into the parking lot. Longer term, knowledge that prices would stay high due to taxes would make decisions on more effecient vehicles easier ( I have a friend that changed his mind from a hybrid back to an SUV when gas prices went from close to $3 back to $2.25 or so). I think a 10% short term and 20% long term reduction in consumption is easily achievable for many, if not most consumers.

    Plus, we’d then be giving the marketplace incentive to come up with ways of reducing consumption rather than government mandating it through some politically favored program such as ethanol. Add the tax to gasoline, take off the benefits for ethanol, and let it compete even up.

    Finally, even if you don’t believe man-made contibutions to climate change is proven, I think its common sense to realize that dumping less stuff into the atmosphere is better than more. And if lower consumption helps to keep future market driven price increases under control, and that money comes to the US treasury to pay off debt or reduce other taxes (hopefully not to be foolishly spent) rather than to the Iranians and Saudis, that has to qualify as a “good thing”, right ?

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