The Anti-Mankiw

I missed this post over the weekend. ThreeSources friend Josh Hendrickson at The Everyday Economist takes on the Pigou Club. Many economists, most notably L. Gregory Mankiw, become captivated by the efficiency and the seemingly free market mechanisms of Pigouvian taxation. The question is: "who decides what is bad enough and how bad it is?" (And do we want government deciding?)

The problem inherent in any such analysis is the view of societal benefit and societal loss that is assumed to be easily calculated and dealt with through Pigouvian taxation. The ability to identify the social cost of a particular action is extremely difficult as each individual has his or her own subjective valuation. The problem is communicating each of these preferences in aggregate form to some central authority. This is a distinct problem in terms of both Hayekian knowledge and a neoclassical framework (Arrow’s Impossibility Theorem). In the absence of this ability, setting the tax rate is extremely difficult.

What’s more, the idea of externalities as a market failure misunderstands the role of the market and what is meant by efficiency. Markets are not efficient in the sense that they produce the optimal outcome of some economist, environmentalist, or other casual observer who wishes for a certain outcome. Markets are efficient because they serve to allocate resources to those who value them the most.

Economics and Markets Posted by jk at May 27, 2008 1:24 PM