Marginal Utility

by Tom Bozzo

Seeing how John McCain's crack (smoking) economic team managed to fool Our Ever-Sharp Media as to the magnitude of the federal gas tax (correct answer: 18.4 cents), I have to ask the question — feature or bug? For McCain, I have no idea. For the economy at least, at times like these the low gas tax becomes a crypto-feature because Politicians of Great Integrity who Wisely Love the Free Market except when the market has to be counteracted for political purposes can only make St. Greg de Pigou cry so much. Same goes for such local initiatives as may arise related to the modestly higher state taxes. Ultimately, the political answer may be, why bother if nobody will notice.

Obviously, it would have been a good idea to have funded the transition from the drive-anywhere-for-anything economy before Peak Oil struck, but the best policy (going along with the principle that the Fed should do its bit to accommodate the needed expenditures) would be better late than never.

Labels: Pigouvian tax

by Ken Houghton

...and I hope he'll expand on it later. But I can't let this go by:

[Ford Motor Co. CEO Alan] Mulally said Corporate Average Fuel Economy, or CAFE, standards have done tremendous damage to the U.S. auto industry, without freeing the nation from its dependence on foreign oil or minimizing global warming.

"I have never seen a market-distorting policy like CAFE," Mulally said. "It's a policy that forces you to put out more small cars than there is consumer demand for to make the bigger cars that people really do want. You're trying to force the market instead of being market-driven."

Yep. That was the problem; they haven't been making enough trucks because they had to make those pesky small cars.

That's why Europe, South America, and Mazda were all profitable in Q1. (I'm not cherry-picking; all areas were profitable Q2.)

Mulally's solution, by the way, is to increase the gas tax so people choose to buy all those European and South American cars that they don't sell here anyway.

Labels: Economics, Pigouvian tax, Trains Planes and Automobiles

by Ken Houghton

A marvelous novelist in her own right, spouse of (and coauthor with) Steve Gould—a novelist in his own right as well as the tech-brain behind of Eat Our Brains—and a lapsed Investment Banking professional, Laura Mixon was the first person who taught me (while shopping in NYC) that one of the easiest ways to help the environment is to carry your own bag for the small-shopping moments that are endemic to big cities.

The dynamic is somewhat different in non-metropolitan areas, where buying is done on a less frequent basis. But the damage is exaggerated every time one opts for "plastic" instead of paper.

Now, one city is battling back:

It was watching sea creatures choke on plastic bags in the Pacific Ocean that finally persuaded Rebecca Hosking that enough was enough.

The British filmmaker had already recoiled in disgust at deserted Hawaiian beaches piled up with four feet of rubbish, the jetsam of Western consumerism washed up by an ocean teeming with plastic. Now, filming off the coast, she looked on aghast as sea turtles eagerly mistook bobbing translucent shapes in the water for jellyfish.

"Sea turtles can't read Wal-mart or Tesco signs on plastic bags," fumes Ms. Hosking, who returned to Britain in March. "They will home in on it and feed on it. Dolphins mistake them for seaweed and quite often they'll eat them and it causes huge damage."

Within a few weeks of coming back, Hosking persuaded her hometown to ban plastic bags outright and found herself in the vanguard of a sudden British revulsion for that most disposable convenience of the throwaway society.

Think globally, act locally. Or maybe follow Tom's suggestion and "kill all the subsidies":

And there is a climate-change dimension as well: Plastic bags are manufactured using oil. Cutting usage in Britain by a quarter would reduce CO2 emissions by as much as 63 tons a year – equivalent to taking 18,000 cars off the road, the government says.

Some countries have taken decisive action against the plastic bag. Bangladesh and Taiwan have banned them. Ireland took a much-lauded step of imposing a tax (€0.15 per bag) in 2002, leading to usage reduction of up to 95 percent. Next month, California will become the first US state to force supermarkets to provide recycling bins.

The tax is just a realisation of the cost of externalities, which, as Prince Charles noted, is actually just a matter of presenting people with the information about the full cost of their decision and letting them decide.

Those who support Greg Mankiw's "Pigouvian tax" argument have only two possible answers to "Paper or plastic"? One is "paper." The other is "I brought my own."

An entire British city and several other economies understand this. UPDATE: And so, apparently, does the mayor of San Francisco, at least as a start.

Labels: Eat Our Brains, environmentalism, externalities, Pigouvian tax

by Ken Houghton

I mentioned this EnvEcon post earlier. It assumes several things:

1. That the status quo is efficient (the market is at equilibrium)
   
2. That the quotes from the article—all of which are from smokers and their suppliers—indicate what will happen (e.g., that a store where 70% of its revenues are from cigarettes "might just have to quit selling cigarettes.");
   
3. That those quotes and the localized result are representative of the overall state, and, most importantly,
   
4. That the Kentucky tax is also optimal for that state.

(In fairness, Dr. Whitehead does note that "an increase in Indiana's gas tax might encourage Indiana smokers to support their local smoke shop." But one suspects he does not mean this as a policy proposal so much as a snipe. He also provides some back-of-the-envelope analysis at the bottom of the post that indicates that he knows the quotes do not represent the expected behavior of the total population.)

Now don't get me wrong; this is a traditional Marginal Utility analysis—but it is applied to a smaller sample and tacitly assumes that all changes to the status quo should be not just optimal, but Pareto-optimal.

Let's now also look at this:

West Virginia and Kentucky, states known for high levels of obesity,diabetes and smoking, have the highest proportion of people with heart disease in the nation, health officials said Thursday.

From a Utility point of view, the costs of behavior should cover the incremental cost of participating in that behavior. (a variation is the Pigouvian Tax argument) Otherwise, we must conclude that there is a "free rider" issue (or, a subset of same, that "externalities" are not being covered).

Given that the prevalence of heart disease, per the CDC study mentioned, is 2.0% greater in KY than that in Indiana, perhaps the argument should be that the KY tax is too low (does not cover the full social cost of smoking) rather than that the IN is or will be too high?

After all, consider workers at a KY-based firm against those at an IN-based firm. If insurance costs are calculated optimally, it will be less expensive to do business in IN. However, non-smokers (the large majority of the population) in both states will pay a higher premium solely because their coworkers are more likely to require costly care. This is, of course, no less of a "tax," but the worker is provided with an even lower Utility.

(In fact, if we look at the county-by-county maps of deaths from heart disease in Indiana for the 1990s (from this CDC site), we can see that the area discussed in the article cited by Professor Whitehead is the highest in the state, matching the legendarily-dangerous and dirty steel-processing area around Gary. So IN workers treated as a whole are paying extra for the "free riders" on the KY border, whose behavior is clearly not socially optimal.)




Also, given the incremental costs, and absent charging full costs for behavior, is this not a reasonable alternative step?

After being thwarted for years, a bipartisan group of members of Congress reintroduced legislation yesterday that would allow the federal government to further regulate the tobacco industry by cracking down on marketing aimed at young people and requiring that reduced-risk tobacco products back up their claims with science.

The Altria Group, the company formerly known as Philip Morris, is among the bill’s biggest supporters.

Labels: externalities, free riders, marginal utility, Optimal Resources, Pareto-optimal, Pigouvian tax