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Chapter 10: Externalities

Recent Posts
(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

August 28

A Nice Application of the Coase Theorem

Josh Barro argues that the Coase Theorem offers a solution to the recent disputes over people reclining their seats on an airline. Barro contends that when people purchase a seat on an airline, they also purchase the right to recline it. If the people behind them do not want them to recline, they should pay them not to.

Textbook References:

Pages 210-211 “The Coase Theorem”

August 31

My Climate Action Plan

Mankiw argues that a carbon tax is the best way to reduce carbon emissions.

Textbook References:

Pages 202-209 “Public Policies toward Externalities”

May 23

Weitzman on Climate Change

Environmental economist Martin Weitzman argues that there is enormous uncertainty about the potential cost of rising levels of carbon dioxide in the atmosphere. But because there is a "non-trivial probability of catastrophic climate outcome materializing at some future time," we should take action now to reduce greenhouse gas emissions.

Textbook References:

Chapter 10 “Externalities”

April 23

A Reading for the Pigou Club

In theory, a corrective tax and tradable pollution permits can have the same effect on pollution. In practice, tradable pollution permits have performed poorly, due to unpredictable fluctuations in their prices, inefficient bureaucracy, and corruption.

Textbook References:

Pages 202-209 “Public Policies toward Externalities”

January 24

A Reading for the Pigou Club

Ben Schreckinger explains why even people who generally dislike taxes should like a carbon tax.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

January 9

A Reading for the Pigou Club

Adam Davidson asks, "Should we tax people for being annoying?"

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

December 17

A Cartoon for the Pigou Club

A cartoon suggests that a carbon tax could significantly reduce our debt problem and fight global warming.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

December 3

A Reading for the Pigou Club

An article in The New Yorker explains why we need a carbon tax.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

September 12

A Reading for the Pigou Club

As a means to reduce fuel consumption, car mileage requirements are far more expensive than a gasoline tax.

Textbook References:

Pages 202-209 “Public Policies toward Externalities”

July 5

A Reading for the Pigou Club

Yoram Bauman and Shi-Ling Hsu argue that replacing current taxes with a carbon tax is a "no-brainer." Most taxes distort markets and are a drag on the economy. A Carbon tax improves the efficiency of markets.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

July 3

Pigou Club News

A bar has named a drink the "Pigou Club." More importantly, Australia has imposed a carbon tax.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

March 16

The Price of Parking

San Francisco is attempting to reduce congestion and make parking places easier to find.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

March 5

What is Chu-Mankiw convergence?

Energy Secretary Steven Chu and Mankiw agree that we should tax gasoline more heavily.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

February 5

Do Manufacturers Need Special Treatment?

Christina Romer refutes the idea that manufacturers need special tax breaks and support from the government.

Textbook References:

Pages10-11 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 201-202 “Technology Spillovers, Industrial Policy, and Patent Protection”

January 19

On SOPA

The Stop Online Piracy Act is an attempt to stop the theft of intellectual property. The details about how the Act would work are worth worrying about, but it is important that property rights be protected.

Textbook References:

Pages 201-202 “Technology Spillovers, Industrial Policy, and Patent Protection”
Page 229 “Conclusion: The Importance of Property Rights”
Pages 301-302 “Government-Created Monopolies”

January 10

How to Reduce Traffic Congestion

A toll on the Highway 520 Bridge near Seattle has substantially reduced congestion.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 226-227 “The Case for Toll Roads”

January 8

Pigovian Taxes Save Lives

Philip Cook and Christine Durrance exam the effects of the 1991 increase in the federal excise tax on alcohol. They discover that it reduced traffic fatalities, violent crime, and property crime.

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”

November 12

The Long, Sad History of Industrial Policy

Government attempts to foster alternative energy technologies have a long history of failure.

Textbook References:

Pages10-11 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 201-202 “Technology Spillovers, Industrial Policy, and Patent Protection”

October 20

Nordhaus on Energy Economics

William Nordhaus argues that taxes on energy externalities would bring substantial long-run economic and environmental benefits.

Textbook References:

Pages 202-209 “Public Policies toward Externalities”

August 15

A reading for the Pigou Club

British Columbia has imposed a carbon tax and used the proceeds to cut income taxes. It is not only efficient, but popular too!

Textbook References:

Pages 203-205 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 208-209 “Cap and Trade”

August 1

An Externality

Actions that impose costs or benefits on bystanders can take a variety of forms.

Textbook References:

Chapter 10 “Externalities”

July 25

The Light Bulb Ban

Is the ban on incandescent bulbs a good idea?

Textbook References:

Pages10-11 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 203 “Command-and-control Policies: Regulation”

July 23

Spending in Disguise

Donald Marron explains how a significant amount of government spending is hidden in the tax code.

Textbook References:

Chapter 10 “The Design of the Tax System”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”

June 25

Crazy Public Policy: A Case Study

Ethanol subsidies drive up the cost of food and do not benefit the environment.

Textbook References:

Pages 32-34 “Why Economists' Advice Is Not Always Followed”
Pages 202-209 “Public Policies toward Externalities”

April 19

A Free Book Well Worth Your Time

Mankiw recommends Policy and Choice: Public Finance through the Lens of Behavioral Economics by William J. Congdon, Jeffrey R. Kling, and Sendhil Mullainathan. A link allows you to download the book for free.

Textbook References:

Chapter 10 “Externalities”
Chapter 11 “Public Goods and Common Resources”
Chapter 12 “The Design of the Tax System”
Pages 484-489 “Asymmetric Information”

March 18

The Coase Theorem in Action

A "Dilbert" cartoon illustrates the Coase Theorem.

Textbook References:

Pages 217-218 “The Coase Theorem”

March 12

NPR Disses the Pigou Club

National Public Radio confuses Pigouvian taxes with sin taxes.

Textbook References:

Pages 210-212 “Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”
Pages 234-235 “The Bloomburg Plan”

February 15

Smog-Eating Roof Tiles

A company has developed roof tiles that eliminate nitrogen oxides, a component of air pollution.

Textbook References:

Pages 209-215 “Public Policies Toward Externalities”

February 5

The Lucky Break of Rent Control

An article discusses the practice of making cash payments to get people in rent-controlled apartments to leave.

Textbook References:

Pages 114-118 “How Price Ceilings Affect Market Outcomes”
Pages 217-218 “The Coase Theorem”

December 16

The Economics of Seinfeld

Clips from the TV show "Seinfeld" are used to illustrate a variety of economic concepts.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 5-6 “Principle 2: The Cost of Something is What You Give Up to Get It”
Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 3 “Interdependence and the Gains from Trade”
Pages 67-72 “Demand”
Pages 73-76 “Supply”
Pages 144-153 “Controls on Prices”
Chapter 10 “Externalities”
Pages 226-227 “The Different Kinds of Goods”
Pages 227-232 “Public Goods”
Pages 230-232 “The Difficult Job of Cost-Benefit Analysis”
Pages 232-237 “Common Resources”
Pages 274-275 “Fixed and Variable Costs”
Page 281 “Economies and Diseconomies of Scale”
Pages 312-315 “Why Monopolies Arise”
Chapter 16 “Monopolistic Competition”
Pages 370-378 “The Economics of Cooperation”
Pages 399-400 “The Supply of Labor”
Page 414 “Compensating Differentials”
Page 442 “Utility”
Page 465 “Utility: An Alternative Way to Describe Preferences and Optimization”
Pages 484-489 “Asymmetric Information”
Pages 556-558 “Technological Knowledge”
Pages 578-580 “Financial Intermediaries”
Pages 598-600 “Present Value: Measuring the Time Value of Money”
Pages 603-604 “Diversification of Firm-Specific Risk”
Pages 606-609 “The Efficient Market Hypothesis”
Pages 630-631 “The Economics of Unions”
Pages 703-705 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 707-708 “The Basic Logic of Purchasing Power Parity”
Page 833 “Time Inconsistency”

December 9

How Economics Saved Christmas

Art Carden rewites "How the Grinch Stole Christmas" to illustrate Pigovian taxes and the Coase theorem.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 217-218 “The Coase Theorem”

July 27

Readings for the Pigou Club

Gilbert Metcalf and USA Today both make the case for a carbon tax.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”

July 15

The Problem With Biofuels

The Congressional Budget Office reports that it is very expensive to replace gasoline with biofuels.

Textbook References:

Pages 216-217 “The Case for Taxing Carbon”

July 13

The Return of Command and Control

The U.S. government appears to be moving away from market-based policy to control pollution. Instead, it will rely more on direct government control.

Textbook References:

Pages 209-215 “Public Policies Toward Externalities”

July 4

The Ubiquitous Ken Rogoff

Ken Rogoff makes the case for taxing carbon. There is also a profile of Rogoff and Carmen Reinhart and their book, "This Time It's Different."

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”
Pages 654-655 “The Financial Crisis of 2008”

June 5

Soda and Other Sins

Mankiw considers the question of whether decisions that do not impose external costs on others may impose external costs on future versions of ourselves. He also asks us if we "trust the government enough to appoint it your guardian?"

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 204-209 “Externalities and Market Inefficiency”
Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Page 251 “Should Income or Consumption Be Taxed?”

June 1

Lessons from the BP Spill

Kenneth Rogoff argues that "when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right." But he also warns that we do not know "how to adapt regulation over time to complex systems with constantly evolving risks."

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 10 “Externalities”

May 13

Who Gets the Goodies?

Ted Gayer points out that the Senate will auction off less than 25 percent of pollution permits in its cap-and-trade bill. As he puts it, "the Senate bill sacrifices economic gain for political support from interest groups."

Textbook References:

Pages 32-33 “Why Economists' Advice Is Not Always Followed”

Pages 212 to 214 “Market-Based Policy 2: Tradable Pollution Permits”


May 12

Pigovian Logic

Holman Jenkins argues that the best way to reduce gasoline use is to raise its price.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”

May 1

How to Solve Inbox Congestion

A blog reader suggests a tax on email as a way to reduce the volume of unwanted email.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Chapter 10: Externalities
Archived Posts

 

March 12

NPR Disses the Pigou Club

National Public Radio confuses Pigouvian taxes with sin taxes.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”
Pages 234-235 “The Bloomburg Plan”

March 1

A New Member of the Pigou Club

Senator Lindsey Graham is in favor of a carbon tax.

Textbook References:

Pages 209-215 “Policies Toward Externalities”

February 17

Thoughts About the Fiscal Commission

Mankiw offers suggestions for the fiscal commission on how to reduce the federal deficit.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 212-215 “Market-Based Policy 2: Tradable Pollution Permits”
Pages 246-248 “The Fiscal Challenge Ahead”
Page 251 “Should Income or Consumption be Taxed?”
Pages 252-253 “Marginal Tax Rates versus Average Tax Rates?”

February 3

The Sorry State of Cap and Trade

Donald Marron argues that "Cap-and-Trade" has become "Cap-and-Spend."

Textbook References:

Pages 212-215 “Market-Based Policy 2: Tradable Pollution Permits”

January 21

Bob Solow on John Cassidy

Robert Solow reviews John Cassidy's book "How Markets Fail: The Logic of Economic Calamities." He discusses the enormous value of markets, but warns against over-stating the case.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Page 6 “Principle 3: Rational People Think at the Margin”
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 10 “Externalities”
Chapter 15 “Monopoly”

January 8

Wealth-Dependent Fines

Should traffic fines rise with the offender's wealth?

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 254-256 “The Ability-to-Pay Principle”

December 30

A Debate for the Pigou Club

Ted Gayer, Brad DeLong and Paul Krugman discuss the possibility of "negative costs" from greenhouse gas reductions.

Textbook References:

Pages 209-215 “Public Policies Toward Externalities”
Pages 232-237 “Common Resources”


December 23

A Reading for the Pigou Club

David Wessel argues that the swelling Federal debt and the politics of climate change make a tax increase on gasoline more likely.

Textbook References:

Pages 209-215 “Public Policies Toward Externalities”
Pages 246-248 “The Fiscal Challenge Ahead”


December 18

Reinhardt on Drug Reimportation

Uwe Reinhardt argues that American politicians are unwilling to fix prices for prescription drugs, so they want foreign governments to do it for them.

Textbook References:

Chapter 3 “Interdependence and the Gains from Trade”
Pages 208-209 “Technology Spillovers, Industrial Policy, and Patent Protection”
Pages 326-331 “Price Discrimination”


December 7

The Pigou Club Talks to the Senate

Ted Gayer makes the case for a carbon tax instead of command-and control policies.

Textbook References:

Pages 204-209 “Externalities and Market Inefficiency”
Pages 209-215 “Public Policies Toward Externalities”

November 27

A Reading for the Pigou Club

John Cassidy prevents an overview of Pigou's ideas.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments can Sometimes Improve Market Outcomes”
Pages 210-212 “Market-Based Policy 1: Corrective Taxes”
Pages 654-655 “The Financial crisis of 2008”

November 18

Happy Birthday, Professor Pigou

The inventor of Pigovian Taxes was born 132 years ago.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”

November 14

Netherlands Joins the Pigou Club

The Netherlands has introduced a tax on every kilometer driven. The tax should reduce pollution and congestion.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 209-215 “Public Policies Towards Externalities”
Pages 216-217 “The Case for Taxing Carbon”

November 5

Environmentalism vs Homeownership

Edward Glaeser explains how the home-buyer tax credit and the tax deductibility of mortgage interest increases the size of the average American's carbon footprint.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 204-209 “Externalities and Market Inefficiency”
Pages 209-215 “Public Policies Toward Externalities”

October 13

Pigovian Question of the Day

Stacy Dickert-Conlin, Todd Elder and Brian Moore find that motorcycle helmet laws reduce the supply of organ donations.

Textbook Reference:

Pages 209-215 “Public Policies Toward Externalities”


May 7

The Auto Industry of the Future

George Will thinks that the government’s efforts to save GM and Chrysler amount to trying to extract sunbeams from cucumbers.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 208-209 “Technology Spillovers, Industrial Policy and Patent Protection”


Mar. 14

Reading the Tea Leaves on the Budget

Mankiw comments on Obama’s budget proposal, He finds that Obama is serious about climate change but not concerned about budget deficits.

Textbook References:

Chapter 10 “Externalities”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 22

The Stimulus versus the Pigou Club

Politicians prefer stimulus money to raising the gasoline tax.

Textbook References:

Pages 32-33 “Why Economists’ Advice Is Not Always Followed”
Chapter 10 “Externalities”
Chapter 12 “The Design of the Tax System”


Feb. 5

My preferred fiscal stimulus

Mankiw gives his own view of what should be done.

Textbook References:

Pages 210-212 “Market-Based Policy 1: Corrective Taxes and Subsidies”
Pages 216-217 “The Case for Taxing Carbon”
Chapter 12 “The Design of the Tax System”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?