EclectEcon

There is a minor squabble in the economics blogosphere between those who favour raising taxes on gasoline and those who .... criticize them. Greg Mankiw has even begun a club called, "the Pigou Club" made up of those who favour imposing taxes on those activities which generate a negative externality.

The idea behind Pigouvian taxes is simple and straight-forward .... on the chalkboard: when marginal social costs exceed marginal private costs of an activity, (and ignore general equilibrium and second-best considerations) then it is efficient to impose a marginal tax on that activity equal to the divergence between the marginal private and marginal social costs [and a subsidy if the externality is positive].

I happily teach this stuff all the time, so I guess that makes me a member of Professor Mankiw's club. I even posted some things here in the past in which I said that if people are so worried about the greenhouse gas effect and if they believe it comes from burning carbon-based fuels, then they should favour increasing taxes on the use of all carbon-based fuels. That is straight-forward Pigouvianism at its very basic level.

That is easy to say. Now to operationalize it. How much should the tax be to promote efficiency? How big is the gap between marginal social and marginal private costs, and how do we know the level of taxation currently in place is not sufficient to promote efficiency?

Greg Mankiw guesses that a proper Pigouvian tax on gasoline would be $1 U.S. per gallon:

With the midterm election around the corner, here’s a wacky idea you won’t often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade.

But how does he arrive at this precise amount for the tax? The simple answer is we don't know for sure. We have to guess. One would hope the guess is well-informed and documented by people who know what they are doing. And this is the heart of the criticism of Mankiw's Pigou club: it is easy to draw these things on the chalkboard, but measuring and identifying the externalities (not to mention the general equilibrium effects) precisely is probably not possible with today's knowledge and technology.

So where does that leave me? My best guess is that my children and grandchildren will be better off if we implement a higher Pigouvian tax on gasoline. I once wrote, "We should tax the snot out of gasoline." I suppose that puts me in the Pigou Club. But I do not hold these views very strongly, and I fully agree with the concerns of those who question whether such a tax could ever be revenue neutral or who question how much the tax should be. I am open to new information and arguments.

But let me emphasize that just because we don't know what the exact size of the optimal Pigouvian tax should be, that doesn't mean it is zero. We must choose some number, positive or negative, and my current best guess is that Professor Mankiw is probably not far off the mark.

For more, see the articles by Brian Ferguson at Canadian Econoview, by Gabriel Mihalache at Economic Investigations, and by Stephen Gordon at Worthwhile Canadian Initiative.

I am unable to find the link now, but when I suggested raising the tax on gasoline in a piece on The Western Standard's blog, many commmenters objected. Some were opposed to giving the gubmnt more money even though I had intended the tax to be revenue-neutral; others, from Alberta, just saw the proposal as another Easterner trying to grab their oil wealth. Pigouvian taxes are not as easy in the real world as they are on the chalkboard.