I ended my semester in “Energy and Environmental Economics” talking about resource optimism and resource pessimism, framed mostly as a big picture debate between Julian Simon and others against Paul Ehrlich and Neo-Malthusians. Simon reports being puzzled at how folks could look at data showing human health and well-being getting better and better and come to the conclusion we were all doomed and it was probably too late to do anything about it.
I’m sure upon reading this New York Times story the pessimists will be as troubled as ever: “Life Expectancy Rises Around the World, Study Finds.”
I appreciate this post from Steve Landsburg on Pigouvian models, Coasian models, and policies addressing external costs (and the comments are valuable too). The foil for his post is an Elizabeth Kolbert New Yorker column, in which she uses two examples to illustrate her argument in favor of a Pigouvian carbon tax — taxpayers foot the bill for the cops’ efforts to fish a drunk guy out of the gutter, and the general public bears the cost of the guy who fills his gas tank to drive his gas guzzler. In both cases, she argues that a tax (on liquor and on gasoline) shifts the burden of the cost in beneficial ways that reduce deadweight loss.
Landsburg’s main point is that we’ve learned more and moved on from Pigou’s original model, notably in the way that Coase characterizes costs from interdependence of individual actions and outcomes as symmetric. Using Pigou’s “polluter pays” logic treats one of the actions as having bad consequences, but as Landsburg notes, “… we now know that Pigou was wrong (although his insights laid the indispensable foundation for later, better insights)”. The most valuable of those later, better insights come from Coase, who builds the reciprocal nature of costs into his model. When individual agents’ actions and outcomes are interdependent, the actions of agent 1 change the outcomes of agent 2 … and vice versa. I also like how Landsburg analogizes Pigou:Coase as Newton:Einstein.
Another notable aspect of this post is the worthwhile link in the comments to a paper from Russ Sobel distinguishing between technological and pecuniary externalities — not all interdependencies lead to situations where there are uncompensated external costs that should be addressed.
For your holiday enjoyment, from John Papola and EconStories, Deck the Halls with Macro Follies!
John’s wry video does a great job of laying out the macroeconomic debate over the drivers of economic well-being — is Malthusian/Keynesian aggregate demand stimulus to overcome a general glut effective, or is saving to invest in capital and innovation to increase productivity the path to prosperity? I’m also amazed and impressed with John’s ability to derive rhyming Christmas carol lyrics from classic economics texts!