‘Could a Carbon Tax Work in the Real World?

by Greg Pollowitz

James Pethokoukis writes over on AEI’s blog:

Nobel laureate Ronald Coase, who died on Monday, criticized “blackboard” economics that lived ”in the minds of economists but not on earth.” Coase’s influential work also questioned whether taxing bad but unpriced side effects — like carbon pollution, for instance — was an optimal solution, even assuming transaction costs like identifying harmed parties. It might be better to assign property rights and let people negotiate payment. No need for lots of government meddling.

As it happens, economist Greg Mankiw again makes the case, via his New York Timescolumn last weekend, that a Pigovian carbon tax is the most economically efficient way — certainly as compared to government mandates — for the US reduce to climate-altering carbon emissions. Mankiw:

If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.” … [And] the new revenue [could be used] to reduce personal and corporate income tax rates.

Elegant. Simple.  But what would Coase make of the idea? Mankiw’s other writings suggests he assumes prohibitively high transaction costs for a property-rights solution to climate change. Imagine assigning global atmospheric property rights and trying to calculate gain and loss. Seems sort of silly. Maybe the Coase theorem doesn’t apply in this case.

The rest here.