SWARAJ  

One of the proposed solutions for funding green technology, including in developing countries, has been to (further) tax international airfares.

The logic goes like this, and on the face of it is reasonable – planes cause a lot of pollution, but the companies do not pay for that pollution. Make sure that their private costs are the same as the public costs they impose – hence an extra tax for this negative externality.

Except, what about the benefits of flying? About people of different places meeting and talking. About different cultures being exposed to each other. About the ameliorative effects of trade and travel on the militaristic impulse in people. While these are inherently too  subjective to accurately quantify, so too were the polluting costs.

Externalities are one of the beautiful, subtle parts of economics – but they too have been co-opted by the big government discourse.

When taxes are need, discount the positive externalities. When you must subsidize, discount the negative externalities.

For example, contrary to conventional wisdom, there could be many negative externalities of higher education. Read this from Econlog “If the higher income that you get from education is due to its signaling effects, then that is a classic negative externality. The investment in the signal is wasteful, and your investment forces others to make a wasteful invetsment” Also, this “Yet maybe college has “negative externalites” as well. For example, maybe the celebration of multi-culturalisim in universities has reduced social cohesiveness that binds diverse persons together in a nation. Maybe universities preach a moral relativism that ultimately leads to more crime, greater corruption, etc.”

Not to mention that almost all activities have externalities. While local security and convenience externalities can be internalized through zoning laws, but what about one’s food habits (some literature shows obesity to be “contagious), what about my reading habits (would I not be an amplifier of literature – good or bad?). And of course, to quantify these externalities is even more tough.

What then happens is that externalities (again, the concept itself is correct and indeed beuatiful) end up as an excuse for government regulation and taxation. Political economy considerations do not move the policies towards lower government, but bigger. Newt Gingrich, Republican politician-cum-intellectual,  for example, has been proposing that all non-carbon energy sources be given a tax break – rather than slap another “Pigouvian” tax on carbon. Get the same pricing signal, and reduce taxes! But of course this idea is not popular with the big-government left.

Similarly, with respect to food habits – we are already seeing different taxation in western countries between, say, soda and fruits. The difference is because of an increase in soda tax, not decrease in non-soda food tax, although the same relative signal would have been achieved.

Not to mention that government welfare programs create their own externalities – create a socialized health plan, and then call my lack of meditation an externality for other taxpayers down the road! And then tax/mandate me!

Externalities – aaah……………..