Taxing externalities

A major (if not main) argument for ‘pricing carbon’ was to ‘correct’ for the negative externalities considered to be caused by ‘carbon pollution’ (ie: carbon dioxide emissions).

The concept of negative (and positive) externalities has been long recognised by economists and in principle can be offset through a tax (for a negative externality) or subsidy (for a positive externality). Of course the key rider, often neglected, is that government intervention should only be considered where the benefits of that intervention outweight the costs of the intervention (in a present value sense taking account of all costs and benefits).

In the case of CO2 emissions, the costs (large) of the intervention are considerably higher than the benefits (close to zero).

However, there is one significant area of negative externalities that remains unexplored. That is organic farming. This is a negative externality because of the harm it causes to the world’s poor through less efficient production and the diversion of resources. Additionally it has led to outbreaks of disease (including malaria) because organic farmers eschew modern and safe pesticides.

Rather than a 0.5 percentage point increase to the medicare levy, a special organic farming tax (on production and/or consumption) should be imposed. I suspect this is more likely to produce a net benefit (in PV terms) than the carbon dioxide tax.

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30 Responses to Taxing externalities

  1. Marko

    Now there’s something to really get behind!

  2. Empire Strikes Back

    Samual

    There can no argument with your analysis of carbon abatement or the fact that organic farming methods yield less produce than modern food production, but what of the property rights of individual land owners? I hope you’re taking the piss.

    From a libertarian perspective, I cannot accept the state creating negative externalities that penalise me for farming my land as I see fit, whatever the merits of my method of my choice.

    As it is, regulation of land use is severely illiberal.

  3. Jim Rose

    see http://www.nytimes.com/roomfordebate/2012/09/10/is-organic-food-worth-the-expense/the-ecological-case-against-organic-farming

    organic food is 20% less productive. larger carbon footprint, and organic pesticides are dangerous..

    much more land would have to cleared to go orqanic.

    Until organic farming can rival the production output of conventional farming, its ecological cost is devastating, and so far, science has been unable to support claims that organic foods are safer or healthier.

  4. Fisky

    I agree. A 100% excise should be applied to organically-farmed products, plus a further 50% excise on baskets, sandals, bicycles, beads and other complementary products. There should also be a ban on organic food advertising.

  5. JC

    While we’re at it, how about taxing renewballs. It’s basically the same principle.

  6. manalive

    A bit OT but on the evidence, CO2 emissions are a net benefit
    .

  7. Empire Strikes Back

    That sounds complex and inefficient Fisky.

    Wouldn’t an omnipotent flat hippy tax be the way to go?

  8. Fisky

    I think windfarm owners should be arrested for cruelty to rare bird species. Renewballs are likely causing mass extinctions and we have to punish the perpetrators. Jail terms for Greens Party members who advocate eco-cide of this nature should be lengthy.

  9. Fisky

    A bit OT but on the evidence, CO2 emissions are a net benefit

    If CO2 emissions are a net benefit then all mitigation programs, including the carbon tax, are themselves causing externalities. We should tax the people who introduced the carbon tax, and spend the revenue on coal mines, until this externality is closed.

  10. JC

    That’s not a joke, Fisky. The human garbage (the Greenslime) are causing serious damage to bird life.

    They ought to be severely punished for what they’ve done and doing.

  11. Gab

    We should tax the people who introduced the carbon tax, and spend the revenue on coal mines, until this externality is closed.

    What an eminently sensible idea.

  12. Fisky

    This is what the Greens support:

  13. caveman

    Yeah I’ve been to that tug fest St Andrews mkts in Vic and a bag of organic mando’s were twice as expensive and tasted like sh!t,,which brings me to taxing externalities,,, it should be based on garbage in garbage out and smart meters should be placed on all dunnys. If its not friggin carbon its organics ,,, don’t get me started on bio diesel that is wank times 10….my god is 351 Cleveland,,amen.

  14. Empire Strikes Back

    caveman – your god is a loud, powerful and reliable god.

  15. From a libertarian perspective, I cannot accept the state creating negative externalities that penalise me for farming my land as I see fit, whatever the merits of my method of my choice.

    I can.

    You have to return to the basis that a land holding is only ever an agreement between individuals that allows you sole use of that parcel of land, for an ongoing consideration.

    The idea of a parcel of land being owned outright should be anathema, as should the concept that land has a value for which it can be sold. These inherently mean that you have surrendered your right to market compensation for your restraint in not using that land.

    Thus there exist externalities that can and should be charged to a land holder for the instances where actions on the land they are holding causes damage to that land, or where it causes damage to other lands, reducing the return to those who have agreed to grant you the opportunity to use that land, or the surrounding land.

    Now this doesn’t mean you can’t farm how you want; it does mean that the farm will be valued according to its current capacity to produce. If organic farming is profitable, or if you are willing to make up the difference, go ahead.

  16. caveman

    ESB you speak the truth.

  17. John Mc

    Drift, I know you’ve been pushing this idea for a long time, but I’m sure even you can see why other people:

    1. see this as just another form of socialism i.e. people need physical space i.e. land to survive, and therefore they need to pay the state a recurring free just to exist just as every socialist would love it to be, and

    2. a shocking intrusion deep into personal lives and choices i.e. again because our existence is so deeply linked to property, suddenly the government has a very powerful, if blunt, instrument to coerce you into living a certain way according to their preferences over yours.

  18. John – I mentioned the state not once…

  19. But let me address the points you make.

    I do see what you mean about ‘socialism’; for me though, it brings in the element of community that Libertarianism can lack at times. Nearly everything we do is in relationship; I don’t think Libertarianism has to be individualistic. It just needs the elements that connect added to it.

    As much as we might like to think otherwise, our actions affect others. It’s one of the areas that is swept under the carpet in Libertarianism. People suggest a litigious society as a means of maintaining order, or hope for the best.

    I don’t see the ‘shocking intrusion’ into lives at all. There is a market price for land, just as there is now. The only difference is that it is annual rather than capital, merely an correction of our current land tax system. The ‘instrument of coercion’ is merely just recompense for the social consequences of your actions.

    Libertarianism’s greatness is in the inherent responsibility that is placed on to each individual. That responsibility must extend to our actions in relation to land.

    But yes, there is a potential for the abuse of the system by government to their own ends; there is in every system.

  20. irving J

    socialism is a negative externality from the minds of arrogant, self obsessed lunatics

  21. cohenite

    CO2 is a positive externality.

    CO2 is uesd extensively in greenhouses; the claim by alarmists that extra CO2 stimulates plant growth but this is limited by N2 deficiencies is being addressed by GM advances, obviously another positive externality.

    Anyway, this is all bullshit, AGW is crap from start to finish and the time for an economic analysis of it is gone, unless of course you can define prosecutions for the promoters of this crap an externality.

  22. sunshine

    Its easy to imagine some scenario where a weird kind of land use makes your neighbor sick , surely the state has a role there .
    As far as organic v’s factory farming goes I think much bigger problems are food wastage and over consumption . Half the world dies from under consumption while the other half dies from over consumption

  23. .

    Utter bullshit sunshine, no one dies in Australia from an abundance of food, they die because they are fat disgusting fatbodies with no self control.

    People in Zimbabwe die because Mugabe should have gotten a .30 cal in the back of the head a long time ago.

  24. WhaleHunt Fun

    AGW is not crap. The miniscule effect is unlikely to be significant, and if significant, can be coped with. The crap is the alarmist exaggeration of the sensitivity of the climate to the elevation of the CO2.

  25. cohenite

    People in Zimbabwe die because Mugabe should have gotten a .30 cal in the back of the head a long time ago.

    Why .30 cal? The choice is greater than that; and they’re only rifle ammunition.

  26. WhaleHunt Fun

    Most interesting Cohenite. I have never heard of the Dedrick Tround. Some people are extraordinarily creative.

  27. Tator

    Cohenite. Missing one of the nicest long range rounds on that chart in the Lapua .338 magnum. Make a nice mess of Robert’s melon from about a mile out.

  28. Leo G

    “A major argument for ‘pricing carbon’ was to ‘correct’ for the negative externalities considered to be caused by ‘carbon pollution’ (ie: carbon dioxide emissions).”

    I don’t think so. The argument for pricing carbon was to reduce the negative externality at a cost per unit of carbon dioxide emissions abated. To ‘correct for the negative externalities’, those who suffer the disbenefit of the emissions would need to be compensated by those who gained a benefit from the emissions.
    The notional benefit gained by a householder is the additional energy they use from the ‘carbon emitting’ relative to what they would use from the most cost effective alternative (non-emitting) source, or a monetary equivalent.
    The future marginal benefit from emission abatement in the present is illusory. It should be discounted to allow for the increased wealth of beneficiaries from per capita real economic growth, and further discounted to allow for the natural sequestration of the anthropogenic component of atmospheric carbon dioxide over time (a half life of about 25 years).
    It should also be discounted to allow for the risk that the externality has been exaggerated.
    If the external cost is found to have been overestimated, then it may be that there has been a net negative externality from the application of carbon pricing.
    How might we apply a price on carbon pricing?

  29. cohenite

    It should also be discounted to allow for the risk that the externality has been exaggerated invented.

  30. So I am assuming the second part of the post is a joke but if not it should be considered a joke.

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