BigBallinStalin wrote:RE: the first and second paragraphs, it's not that it's difficult; it's rather the case that government has hardly any idea. Individuals know to some degree, after trial-and-error, their specific marginal benefit and marginal cost curves for various activities (e.g. grocery shopping). The problem with PWE is that it postulates a representative individual, whose utility curve + constraint represents the MB and MC curves of all society. (This is impossible to know; it's simply assumed, so the knowledge problem is assumed away by the economist).
It doesn't seem impossible to know in principle. It's true that the government can't know the utility curves of every individual, but it seems more straightforward to ask the question of what the representative individual's utility curve is. This seems doable because when you have a large enough number of people, you can average over all of the quirks that any individual represents. If you can estimate the monetary damage suffered to the society, then you can attribute the cost of that damage equally to everyone who contributes, in proportion to the amount that they contribute, since a molecule of CO2 doesn't care where it came from. So I don't believe that this is a problem with the framework but rather a problem of subjective assessment of total costs. If you think of examples like noise pollution, it's true that it's hard to objectively state what even the average cost to society is. But that's not an indictment of the framework of attempting to internalize externalities, so much as saying that we should only apply the framework when we're confident that we can provide some meaningful estimate of the representative individual's utility curve.
The Pigouvian economist can simply imagine huge negative and huge positive externalities which do not exist in reality (e.g. education). Furthermore, individuals don't know the long-term costs of pollution, so there's no way to graph that social MB and MC curves in order to determine the magnitude of the negative externality.
Individuals may not know, but policymakers do have a better idea in this case. Again, the most compelling criticism here is that the policymaker may be way off due to unintended consequences, but that doesn't mean that policymakers can't be more knowledgeable than individuals. They absolutely can be in cases like this. The same is true for education. Individuals won't know for decades after they receive the education whether it was useful to them, so expecting them to be able to assess the value of education to themselves seems to be an absurd approach.
Pigouvian solutions are redundant in the zero TC cost world if people can simply pay polluters to reduce pollution (or if polluters would have to pay others for the right to pollute--on the margin). Without that agreement, there'd be no market prices on marginal amounts of pollution, so we'd get inefficient amounts of pollution (hence an externality).
That's only true if people are directly feeling the effects of the pollution and their desire to rid themselves of the pollution is proportional to its negative effect on their lives. When it comes to noise pollution or traffic, sure, I trust an individual to be able to confidently assess the relevant utility. When it comes to acid rain or global warming or smog or any global issue where people cannot assess the cause of the problem, how can we expect them to know what to do? They don't even know who the polluters are, so how can they adjust their purchasing decisions to decrease the amount of acid rain?
The Pigouvian solution is nonoperational if governments don't know what people don't know (i.e. the MB and MC of varying amounts of pollution in various places across time. The marginal cost is not the global warming information and its uncertain range of consequences, but rather ). PWE simply assumes that it does know--through the guise of its cute models. The transaction costs are too high for people to come to some agreement on (a) who's rights are being violated (e.g. who owns the river? No one, if it's owned by the government), and (b) monitoring costs. For example, if you're my neighbor, and you like to place music real loud at midnight, that's a negative externality. If possible, we could engage in Coasian bargaining where I pay you to limit the noise to only weekends, or you'd pay me for the right to do so (depending on how the court rules). Hopefully, the inefficiency is reduced to zero since the monetary payment reduces the inefficient level of noise pollution.
Yeah, that's fine. Again, I would argue that the Coase solution doesn't apply when people don't even really know what impacts they're purchasing. However, I'm also willing to concede that I don't really think about this policy in Pigouvian terms. There is an externality and we are trying to put a price on carbon to reduce that externality, but I freely admit that the actual price needed to do so may have little correlation with the true social cost, given how hard it is to estimate. As a result, I believe that we should just put a high enough price on carbon to get the transition done, rather than worry too much about whether we're truly representing the external costs appropriately. It ends up sounding a lot like Pigouvian economics, but as Coase is pointing out, let's just talk about whether it's a good idea rather than whether the framework itself holds up.
RE: the third paragraph, if governments actually did have that information, then all they'd have to do is make it available,
They have, cf. the IPCC reports
and to let the courts figure it out (in a zero or low TC world).
What court do you know of that would try to fine polluters for global warming? Besides, I don't even think that's the issue. It's not the fault of polluters that global warming is happening, one could equally assess the problem to the people who demand fossil fuels, and then what do we do?
To some degree, firms are already addressing the issue by 'going green', and many consumers are demanding products which result in lower carbon footprints.
Yes, but the degree is not large enough to solve the magnitude of the problem. This is probably largely because 1) the number of people who actually care about "going green" is less than half of the population and 2) of those who do care about it, not many can afford to make meaningful lifestyle changes on their own. Buying solar panels, etc. is expensive.
So, if a Pigouvian tax is proposed, you'd have to consider its impact on the rules of the game within the US economy and its consequences. If a carbon credit system is imposed, same thing. When considering a policy, you'd want to estimate the opportunity cost (e.g. if the Pigouvian tax is too high, much wealth is destroyed, and it could've been better had there been no tax. How so? The carbon credit system could've been more efficient, or the destruction in wealth eliminates more efficient ways of production which would have reduced carbon emissions better than the Pigouvian tax). Or, local governments can build bigger levees (another opportunity cost of Pigouvian taxation).
Sure, but it's not like this type of analysis has remained unfulfilled. Plenty of people have taken a stab at estimating what the most effective policy would be in terms of the US economy, and almost all agree that the straight up pricing mechanism is superior to carbon credits or command-and-control. I think the strongest argument is that the carbon tax is least susceptible to the market trying to shuffle the price away; if the price of CO2 is $50 per ton then there's nothing a corporation can do to avoid the fee if they produce a ton of CO2. That's why most people are deeply skeptical of cap-and-trade mechanisms -- all they do is demonstrate how good the market can be at minimizing the cost of the carbon permits (cf. Europe), which is the exact opposite of the behavior we want.
