Path to a Pigouvian Tax?

Congressional Republicans are in the midst of trying to enact major tax reform, a staple of President Trump and Treasury Secretary Mnuchin’s economic plan. This could tie into the class in a wide variety of ways, including whether taxes on the wealthy (the ones this overhaul would target) are simply effective means of providing insurance against poverty, or providing redistribution as a sort of public good which would be inefficient to do privately. However, it is one of the Democratic Party's responses to this tax reform that immediately struck me as tied into what we were learning in class. 

2 Democratic Senators view this as an opportunity to pass a Carbon Tax, a Pigouvian tax that many climate advocates have long believed will help solve overpollution by internalizing the externalities in emitting carbon (a prominent greenhouse gas). By adding a tax equal to the marginal damage of pollution (the damage not accounted for by Private Marginal cost), which they calculate at $49 per metric ton, they can raise private marginal cost to private social cost. This would mean there are no negative production externalities, as producers bare the entire social cost, and would then produce where social marginal benefit (no difference from private) equals social marginal cost, the efficient level of pollution. While other measures, such as tradable permits or the Coase theorem were discussed in class, these are difficult to implement because of concerns over how to determine optimal quantity without markets and how to distribute permits, and free rider and negotiation cost problems, respectively. The primary obstacle to a carbon tax has always been political feasibility, and if Democrats can use the tax reform to make it a political reality, it would mark a significant step in removing a major market failure.

What is wrong with Connecticut?

I come from the utterly uninteresting and lackluster state of Connecticut. When I graduated, I was thrilled at the opportunity to live outside its borders. Much to my parents' dismay, I don't ever plan on living there permanently again. Now, it seems many others have joined me, based on our falling population and an influx of articles titled similarly to this one from the Atlantic, What On Earth Is Wrong with Connecticut? Answer? A lot, but much of it to relevant to Tiebout's article on revenue-expenditure bundles.

Connecticut used to be, and still is to a large extent, a refuge for the bankers who did not want to live in New York City. The downside, however, of decreasing crime in the city is that companies and individuals have stopped flocking to Connecticut like they used to. That explains a great deal of why people are moving to Boston and New York City, which also have high tax rates and high costs of living. Connecticut is now not much cheaper, not much safer, and way less convenient than nearby cities. On the other end, people are moving out of the Northeast as a whole to escape the cold weather and the high level of taxes and regulations. Many state elected officials are now desperately trying to find ways to change Connecticut's revenue-expenditure bundle to make it more attractive relative to other states, and to return to the optimal size population so our housing prices stop falling.

Fortunately for Connecticut, we do not live in Tiebout's world of perfect mobility and no job constraints, forcing many to stay put -- not out of desire, but out of convenience and necessity.

Fire, Fury and the Prisoner’s Dilemma

The prisoner’s dilemma describes a situation where it is in your best interest, given uncertainty over how the other player in the game will act, to betray the other participant. This is known as a dominant strategy. This strategy, however, is Pareto inefficient as there exits a Pareto efficient move for both players, or an action that helps at least one without harming any.

North Korea and the US are on the verge of a prisoner’s dilemma scenario. The situation is plagued on both sides with uncertainty and misinformation regarding the other’s intended actions. North Korea does not yet have the full nuclear capability to engage in a proper prisoner’s dilemma. However, if our worst fears are realized, North Korea and the US may find themselves in a situation where, faced with the uncertainty of the other’s actions, nuclear threats may be triggered. Of course the Pareto-efficient equilibrium would be one in which both countries commit to nuclear non-proliferation. Without intervention, however, this seems unlikely. In Mueller’s eyes, the prisoner’s dilemma presents the rationale for the formation of government, which has the ability to move a Pareto-inefficient allocation to a Pareto-efficient allocation. In the case of today’s nuclear threat with North Korea, according to Mueller, a 3^rd party enforcer is the only option to keep both countries from defecting as predicted by their dominant strategy. In the absence of cooperation between the governments of North Korea and the United States, an international body to enforce nuclear disarmament is essential.

300% Tax Not Stopping Anyone

When thinking of polluted cities the list generally includes: Mumbai, Beijing, and other large cities. But joining that list is Kathmandu, Nepal. In 2016, Yale University's EPI rated air pollution in the country as the fourth-worst in the world. A large part of this is due to the increase in automobile sales within the last several years. Just in the 2015-16 fiscal year there was a 109% increase in registered vehicles. Along with that, banks were, until this past year, offering auto loans for just 10% down. This helped many people get into the car market which they otherwise would have been priced out of.

This increase in cars has created a negative consumption externality, where the private marginal benefit is greater than the marginal social benefit. By people buying cars that contribute to increased pollution and decreased air quality, there is a negative effect to others in society that cannot be compensated for. While the government has tried to deter people from owning cars for more than a decade with a corrective tax that now stands at 300% on car sales, the low downpayment percentage along with around 6% interest rate does not help the tax restrict quantity to the allocative efficient output. 

Visas and Tiebout's Preference Revelation

EB-5 visa is an employment based fifth preference visa, better known as the investor visa. Eligible immigrants can become permanent lawful residents, and eventually citizens, upon investing $1 million in a US business that employs at least 10 American workers. In FY2016, China, Vietnam and South Korea comprised the three largest nationality categories for EB-5s. The most popular settlement states were CA, NJ, NY and PA. Taken in the most extreme case, EB-5 visas may represent a modern day Tiebout preference revelation for the wealthy. 

Tiebout’s model of local expenditures attempts to solve the problem of preference revelation. He argues that consumer voters move to the localities that best match their preferences towards the optimal bundle of public goods. Could the same idea be applied to investor visas? It may sound like a stretch, but these visas provide a vehicle for the extension of market principles into public goods provision. Immigrants essentially “purchase” permanent residency, and in doing so "shop" around in pursuit of the optimal public goods provision. The state that they move to from their home country represents that which provides the most desired bundle of public goods.  Of course in this case, moving is not costless. However, if we ignore this violation of Tiebout’s assumption – the basic model could still apply. So strong is the desire of these investors to move to a locale with a more desirable provision of public goods, that their expression of preferences is unmistakable and expensive.

Plastic Pollution

Plastic water bottles are cheap, convenient, and also probably in your tap water. Researchers from the State University of New York and the University of Minnesota, Orb just tested 159 different tap water faucets for pollutants, including ones from the US Capitol building and the Trump Grill in New York. 83% of those samples contained microscopic plastic fibers from products such as synthetic clothing and plastic water bottles. The effects of ingesting plastic fibers are not yet completely know, but studies involving animals point to some negative health effects. 

"There's no way the plastic fibers I may be drinking are mine, right?" you might say. "How is that fair?" you might ask. Well, I don't know if it's fair or not, but it's definitely a negative consumption externality. When someone consumes a product that contains plastic and doesn't dispose of it correctly, it goes into the environment and can eventually end up in the water that others drink, possibly negatively affecting their health. As of now in the United States, this externality is not accounted for. The European Union requires member states to ensure drinking water is free of contaminants– the United States does not. Ronald Coase would argue that individuals and firms can reach the efficient output of plastic materials, correcting for negative externalities, without government intervention. The European Union, though, may be onto something with their water standards.

The Great Barrier Reef and Externalities

The Great Barrier Reef is one of the world's great wonders; however, it is facing serious threats due to pollution from coal and farming industries and climate change, which is raising the water temperature. As no one owns the Great Barrier Reef, there are no defined property rights, making it difficult to reach a private market solution to this misallocation of resources.

The farming and coal industries are producing a quantity that is above allocative efficiency due to their negative production externality. The industries are producing pollution that directly destroys the reef and are also contributing to causes of climate change. To make these industries internalize the external costs of their production, a Pigouvian tax by the amount of the external cost would shift the Private Marginal Cost curve to the Social Marginal Cost curve, resulting in the allocatively efficient output. The Australian government, however, is not looking at ways to make the industries internalize the costs of the externality, but is instead pursuing ways to increase water quality and reliance on renewable energy in an effort to save the reef.

Hurricane Irma Hits Florida Hard

Southern Florida experienced a category 5 hurricane as Irma reached its coasts. With predictions of incredible wind speeds and storm surge, millions of Floridians were urged to evacuate. 31,000 people alone evacuated the Florida Keys last Wednesday on U.S. Route 1, a public good maintained by the Florida Department of Transportation. Normally, the highway has no rival risk since the presence of additional drivers does not usually affect the utility of consumption for another driver. U.S. Route 1 is also a non-excludable good since anyone may use the road, and there are not tolls on the road in the Florida Keys which would create a monetary barrier to consumption.

Last Wednesday was not a normal day of driving consumption in the Florida Keys. The high volumes of traffic caused by the evacuation created a rival risk for the highway. As more people entered the highway to evacuate, the utilities of other drivers lowered. The thousands of drivers on U.S. Route 1 brought traffic to a standstill, hindering the evacuation of each person. The optimal number of people to share the road in a single day was exceeded, and this all displayed Buchanan’s theory that there is no such thing as a purely public good. U.S. Route 1 is subject to great rival risk and indeed has an optimal number of drivers for the road to be shared with, especially in the State of Emergency Hurricane Irma caused.

Atlanta pays for you to enjoy the Beltline

            If you’re in Atlanta, you should visit the Beltline. The Beltline is a 22-mile loop of walking trails, streetcars, and residential neighborhoods that surrounds the city. The entire loop is a public good: anyone can enjoy it for free, and many people can enjoy it simultaneously without reducing one another’s utility.

            Free-riders—the consumers who use the Beltline without having paid for its construction—take advantage of the Beltline. The city has financed the project, at least in part, through Tax Allocation Districts. These districts forgo future property taxes in order to fund current infrastructure projects. In other words, businesses and residents in Atlanta pay for the Beltline. Since an individual’s choice to enjoy the loop does not have a noticeable impact overall, and since the loop is not excludable, individuals are incentivized to use the trails without paying for the development.

Affordable Housing and Tiebout's Model

     There is a lack of affordable housing in Charlottesville. This problem falls disproportionately on black residents- as Charlottesville experiences rising housing costs, lower income families are pushed out of their communities.  The median cost of rent rose as much as 4 percent for apartment dwellers in Charlottesville and Albemarle County in the past year, according to data collected by the Daily Progress. The issue of gentrification in Charlottesville is amplified by competition between students and lower income families for affordable housing in the city. This is exemplified clearly by the "Standard" Apartment Complex, opening leases on West Main Street, which offers "luxury apartments" for UVA students, but is not offering affordable or public housing units in the building, despite proximity to both downtown and public transportation. 

     However, the Charlottesville City locality is changing its expenditure breakdown. The same day it voted to remove the statue of Robert E. Lee, the City Council also unanimously approved a $4 million spending plan to address racial disparities. Over the next five years, $2.5 million will be allocated redevelop public housing; $250,000 will go to expanding a park in a black neighborhood; and $20,000 a year will pay for G.E.D. classes for public housing residents (New York Times). Invariably, this expenditure will change the bundle of public goods that the City of Charlottesville provides to its residents. For the past several years, the money allocated to public housing has only been sufficient to preserve affordable housing units, and the growth of total units has crawled from 1,933 to 2,006 from 2010-2015 (Daily Progress). According to Tiebout's economic model, the City of Charlottesville's reallocation of $2.5 million towards public housing will move some individuals towards their optimal bundle of public goods, while others will move away from their optimal bundle. Because of Tiebout's assumptions of perfect mobility and no job constraints, people will react to these changes. Individual's preferences will be revealed over the next five years as pack their bags and move to and from Charlottesville. 

Free-riding has lowered the quality of news

The rise of the internet has made news and information a largely non-excludable good. People can be excluded from accessing individual publications like the Wall Street Journal through paywalls, but cannot be excluded from the seemingly infinite amount of information and news across the internet. People can also get around being excluded from certain sites by using different browsers to get more 'free articles' or using softwares to circumnavigate the paywall. This has led to an increased unwillingness to pay for online subscriptions.

In turn, news sources are increasingly making their product completely non-excludable, in exchange for copious of amounts of advertising on their sites. Now instead of trying to gain long term, paying subscribers by providing quality news, publications are incentivized to post articles with incendiary, shocking, and even misleading headlines in order to increase their number of page views to garner more advertisers. Those free-riding off of actual subscribers, trusting that sites like The Atlantic will continue to provide all their news for free regardless of whether they pay into it, are creating a market failure in the sense that there is less quality news than the allocatively efficient amount. Thus this free-riding behavior has forced news outlets to adjust their revenue models accordingly and lowered the quality of news in exchange for click-bait articles.

Variable Toll Road Rates

This past summer, I worked for a firm that serves as a financial advisor to government agencies needing to issue debt to fund capital improvement projects. One of their clients is the Central Texas Regional Mobility Authority, an agency responsible for transportation infrastructure. I sat in on one meeting regarding this initiative: variable rate toll roads to manage congestion on 183 North in Austin, TX. The toll rates will be higher during times of peak traffic and lower during non-peak periods. Economists would call this “peak load pricing.” 

This is also an attempt to correct for a negative consumption externality. Consider each driver "consuming" 183 North individually. During non-peak periods, one driver hardly affects another. However, each additional vehicle imposes an external cost on the other drivers by increasing congestion (thereby increasing every driver's travel time, discomfort, frustration, etc.). With this external cost, social marginal benefit is lower than private marginal benefit, and there is overconsumption. With the variable toll rates, drivers will internalize the cost of the congestion they create by taking 183 North. As the rates increase, each driver's private marginal benefit will fall, resulting in "allocatively efficient" consumption.

President Trump & His Influence on Rent-Seeking

Adam Davidson, in his New York Times article entitled “What Donald Trump Doesn’t Understand About ‘the Deal’”, argues that Donald Trump can be seen as a canny spokesman for a unique sort of economy: rent seeking.  We obviously learned in class that rent-seeking is when resources are spent in order to obtain rents which derive from some activity that has negative social value (DWL).  Davidson presents the case that Trump’s vision completely matches what rent-seeking behavior is all about.  Trump isn’t just a rent-seeker himself based on his rent-seeking behavior to exploit monopoly power in his real estate business in up-state New York; “his whole worldview is based on a rent-seeking vision of the economy, in which there’s a fixed amount of wealth that can only be redistributed, never grow.”

Trump essentially embraces rent-seeking behavior by grabbing more than his share by “cutting deals” as a New York real estate tycoon.  Many economists and political scientists think that a higher proportion of the economy comes from rents.  There is a wide array of economists of different political biases that agree that reducing rent-seeking behavior is essential to improving overall growth and making “America Great Again.”  However, the descent into a rentier economy would only accelerate with a mentality like Trump’s in the White House.  Thus, there’s the irony:  will Trump actually make “America Great Again”, or will he perpetuate further economic inefficiency and rent-seeking behavior?