Saturday, September 21, 2013

Positional Externalities, Culture, and Regulation vs. Taxes

The normal thinking is that pollution taxes are much more efficient than regulations. So, if you want to lower carbon – because you don't think the probability of frying your grandkids' planet has to be 100% before you take preventative action – then you put in a gas tax, rather than increase mileage standards a lot.

This way, if someone really wants to drive a ginormous truck, they can still do it, just pay a lot more to cover the cost of their increased polluting, endangering other drivers, sending money to terrorist supporting regimes, wearing the roads, using parking space, blocking other people's view,…

But as usual, this kind of analysis doesn't take into account the pink elephant of economics, positional externalities. If you just raise the gas tax, a lot of people will still buy these ginormous trucks. Then others will feel bad about buying regular size and compact trucks; they will feel a lot of pressure to just spend the money, borrow more, buy the cheap health insurance, etc., so they can buy a bigger truck, and not be the one with the tiny one (yes, we're still talking about trucks, but it's the same idea).

On the other hand, if you have a regulation that says no truck can get less than 30 mpg, unless there's a valid work reason, then no one can get a ginormous pollution machine; there's not this pressure. And also it can change public attitudes and culture when no one is driving around in these monsters. I'm old enough to remember in around 1980, when mileage standards suddenly skyrocketed and cars and engines suddenly became way smaller. It really changed the car culture. Prestige now came much more from luxury amenities and crushed velvet.

Of course, you could increase the gas tax enough to pay for not only the pollution externalities you incur on others, but also the positional externalites, the collision danger externalities, the sending money to terrorist sponsoring regimes externalities, etc. But you still don't change the culture as strongly as with a blanket regulation.

Look at World War II, where the war effort really helped give birth to the great middle class, until the recent generation of far right dominance killed it. You had a lot of rationing on things like meat, rather than just a tax. So everyone was contributing in this way. It was a community effort. Not the middle class and poor were able to eat very little meat, but the rich went right on eating steak just like they used to, war or no war, and just easily paid the tax.

And look at regulations against racism. Sure, you could have a tax on business to somehow cover the cost of racism they incur on others and society, but it would be hard to decide on what such a tax should be. And, it wouldn't do nearly as much to change the culture of racism.

I should add, though, that it's probably best to have a combination of taxes and regulation. Sometimes the polluting, or other externalities, are so varied and/or fungible, that it's most efficient to just get at the root with a root tax, and perhaps some regulation in addition, to get the best of both approaches.