Munger on Externalities

HT - Kevin Rollins


I used to blog on externalities a lot on here. It's a very important part of economics, and a lot of libertarians have a tendency to treat it (and Pigou) like voodoo. It's very nice to see that this is not true of Mike Munger's new video on externalities. Not only does it outline the theory well, but it also gives Pigou the credit he deserves. He's long been treated like a dummy by people, particularly in the public choice theory tradition, but he made most of the major points that they would only later come to! I think an important factor in this turn may be an article published earlier this year on Pigou by Backhouse and Medema in the Cambridge Journal of Economics.

I would raise two critiques with the video:

1. I strongly disagree with the contention at about 4:20 that economists rarely talk about the trouble governments have in setting the ideal Pigovian tax rate. That just sounds bonkers to me. I don't know how they teach externalities at Duke, but my experience is that this is bullet point number one in discussions of the pros and cons of Pigovian taxes. I really don't know what he could be thinking here.

2. It's only a five minute video, but I'd go more into the limitations of Coase. Coase is often treated as having made Pigovian taxation untenable for serious people. This is wrong, of course. Policy is always about social consensus and our values and ethics. Sure bargaining can solve some of these problems, but sometimes we simply don't think its right that person who bears a cost has to compensate the aggressor for damages done! In some circumstances we find that so distasteful we call it "extortion"! Coase is important for the relevance of transaction costs to other areas of economics, but he definitely didn't toss Pigou out the window. Pigou gets a "yes, but..." and it would have been nice to add at least a sentence or two of "yes, but..." to Coase.