Anyone who reads this blog knows that I am a fan of Pigouvian tax policy. In essence, this means using tax policy to balance externalities. If people engage in a behavior that adds cost to society, then taxes can be used both to discourage the behavior and to compensate society for those costs. For example, if speeding costs society in terms of increased health care costs, pollution, and other results from the increase in accident risk, we can fine speeders so that the money raised pays for the costs and drivers are discouraged from speeding. This only works if the money raised is actually spent on the externalities rather than redirected to other things.
Similar approaches can be used for pollution (carbon taxes), gambling or alcohol taxes, etc. Recent proposals for sugary soda taxes could also be Pigouvian, although I am not sure if the money raised would be directed to fighting childhood obesity.
I read an article recently that suggested we would be better off focusing our efforts on reducing the externalities instead. Rather than fining speeders, let’s make roads safer for fast driving so we can drive as fast as we want without creating the externalities in the first place. Of course, this is also a good approach, but I suppose it depends on how feasible the solutions can be. Which is easier, innovating road design to make them safer for speeding or adding more police to the highway patrol? Can we fight childhood obesity in ways that allow kids to drink as much sugary soda as they want? I’m not sure. But the article is correct that these challenges should be approached from both directions.
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