Environmental Exigencies and the Efficient Voter Rule

Externality problems hinder solutions to existential threats, including climate change and mass extinction. To avert environmental crises, policymakers seek mechanisms that align private incentives with societal exigencies. Successful solutions bring individuals to internalize the broad repercussions of their behavior. In some cases, privatization, Coasian bargaining, or Pigouvian taxes effectively place the weight of externalities on the relevant decision makers. Yet, the available remedies often fail to provide satisfactory outcomes, and inefficiencies persist in the markets for energy, transportation, and manufactured goods, among others. This article explains how a simple voting mechanism can achieve socially optimal decisions about many of the innumerable externality problems that remain.

The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation

When consumers or firms don’t face the true social cost of their actions, market outcomes are inefficient. In the case of negative externalities, Pigouvian taxes are one way to correct this market failure, but it may be infeasible to tax the externality directly. The alternative, taxing a related product, will be second-best. In this paper, we show that in the presence of heterogeneous externalities and elasticities, this type of indirect tax performs poorly. In our empirical application, gasoline taxes to address pollution externalities, less than a third of the deadweight loss of the externality is addressed by second-best optimal taxes. (JEL D62, H21, H23, H71, H76, Q53, R48)

International Market Mechanisms

This chapter describes the role of international market mechanisms in reducing pollution and the costs of doing so. It looks into two mechanisms established by economists John H. Dales and Arthur Cecil Pigou. Dales propounded the mechanism of ‘pollution permit-trading’ which, instead of regulating pollution on a source-by-source or emitter class-by-emitter class basis, a regulatory agency from the beginning would limit the overall amount of pollution allowed. Firms could then trade amongst themselves, effectively using the market to determine which of them should be able to pollute, how much, and when. The other market mechanism is the Pigouvian tax, which is the tax levied per unit of pollution emitted. By pricing these external costs and forcing polluters to consider them in their private calculus, Pigouvian taxes force polluters to balance the social costs and their private economic benefits of polluting.

The Curiously Continuing Saga of Choosing the Measure of Welfare Changes

The results of the vast array of willingness to accept compensation/ willingness to pay (WTA/WTP) disparity studies provide strong evidence that people value many losses and reductions of losses, more, and often much more, than otherwise commensurate gains or foregoing of gains. These findings also make it clear that people commonly value many changes not as final states as standard theory assumes, but as positive or negative changes relative to a neutral reference state. Consequently, not only are losses to be most accurately assessed with the WTA measure, but most positive changes that reduce losses are as well. Current practice, which rarely takes such reference dependence into account, is therefore likely to substantially understate the value and importance of projects, policies, and programs that reduce losses. Failing to take the possibilities of valuation disparities into account also appears to undermine other kinds of analyses as well, including, for example, the estimation of elasticities and setting effective levels of Pigouvian taxes.