Landsburg on Pigou and Coase

Lynne Kiesling

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.

2 thoughts on “Landsburg on Pigou and Coase

  1. I have seen estimates of the environmental externalities costs of CO2 emissions varying from ~$20 – $300 per ton. I have also seen analyses which suggest that the environmental externalities resulting from incremental CO2 emissions are actually positive for the next ~50 years, based primarily on the benefits from more rapid plant growth in CO2 enriched environments.

    The above suggests that we currently have no clue how to assess the value/cost of incremental CO2 emissions. Therefore, the tax rate should be set based on our perceived revenue requirement. (sarc off)

  2. Interesting piece … I do have a few points … First we have no material evidence that CO2 is a negative externality. We know it is not a form of pollution on the planet earth as has existed is the last several thousands years, exists today or it will in the foreseeable future.

    Second, while you correctly note that Pigou approach was erroneous and that Coase offers a better approach, it is worth noting that Coase also presents a material threat to property rights in his decision to treat all contested relationships as repricol. It may be true but property rights a prior should still matter. If they do not opportunism can run rampant as we see when local governments claim eminent domain.

    More work needs to be done to address opportunistic behavior

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