## Pigouvian compendium

##### Contents

We’ve already established that I’m a fan of Pigouvian taxes and correcting externalities. The harms I visit on my neighbor should be the result of malice aforethought; we should have to look each other in the eye rather than shrug in world-weary acknowledgment of systemic perversities. Because of that interest, I wanted a sense of the total magnitude of Pigouvian taxation possible. Are American GDP numbers the result of accounting fraud that would put Enron to shame? How much would American production numbers decrease if we accounted for externalities? If the federal government shared my zeal for technocratic delights, how much of the federal budget could be funded by Pigouvian taxes? How much would an individual’s annual expenses increase if they’d internalized all their externalities and been absolved of their sins?

To answer those questions, I reviewed the academic literature and found every proposed Pigouvian tax I could. I did not include:

General sin taxes
Public health practitioners and others sometimes talk about taxing certain goods on the grounds that they correct for irrationality. Plebes People don’t know about the long-term harmful effects of sugary drinks or lack self-control, for example. Or cigarette taxes should be increased to stop people from enjoying themselves killing themselves prematurely. While there are reasonable arguments (despite the snark above) in support of such taxes, these aren’t the same as Pigouvian taxes. Pigouvian taxes correct for externalities and arise even with rAtIoNaL actors due to inherent failures of markets; these other taxes try to nudge toward actions that don’t create externalities and wouldn’t occur with rAtIoNaL actors.
Uncalibrated taxes
There are many jurisdictions that have taxes on externality-producing consumption—think cigarette taxes or alcohol taxes. However, these are just as likely to be the result of smoky backroom deals as of analysis grounded in an estimation of the externalities imposed by consumption. Thus, I excluded them and only looked for taxes (real or proposed) where numbers were intended to precisely ‘internalize’ externalities.

The results of this review are presented in the table below. The externalities associated with emitting carbon and driving are the largest by far. If we sum up all the known externalities listed in the table, we find that they come to $679 billion per year in the US. This is around 3.5% of US GDP and around 15% of US federal spending. The per capita cost of these externalities is around over$2150 per year. (The sum of externalities is described on annual basis and so excludes quantities which are stocks rather than annual flows. In particular, obesity and SME debt are current totals rather than annual changes.)

### Driving

Everyone knows they’re killing the planet one mile at a time when they drive. What’s perhaps less obvious is that this is the least terrible thing about driving. The table below shows estimates of the many external costs of driving1. While driving’s contribution to global warm costs 8.5 cents per gallon, the external costs of collisions clock in at 73 cents per gallon. The proper Pigouvian tax that would internalize all the externalities is estimated at $2.15 per gallon. This is substantially larger than the current fuel tax in the US which averages 48 cents per gallon and is, interestingly, substantially lower than the current fuel tax in many European countries. Brief explanation of the less obvious externalities: Congestion When I pile into a traffic jam, everyone behind me is slowed down yet more. Accidents “[W]hen I drive, I make it more likely that you will be in an accident. That is an external cost, which from an economic standpoint is equivalent to pollution. The numbers here are staggering. According to the US National Highway Traffic Safety Administration, there are more than 30 million traffic accidents a year. It estimates that the annual dollar cost of accidents, including property damage and personal injury, amounts to more than$400 billion a year.” (Parry, Walls, and Harrington 2007)

Okay, I lied when I said $2.15 per gallon “would internalize all the externalities”. There are more externalities not in that table (omitted because their harms don’t track fuel and mileage very well) because driving is a slow-motion apocalypse: • Noise • Highway maintenance costs • Urban sprawl • Parking subsidies • Other environmental externalities ### Carbon William Nordhaus was one of this year’s fake Nobel Prize winners for his work on climate change. In (Nordhaus 2007), he suggests an initial carbon tax of$50 per tonne of carbon which would increase by 2-3% a year in real terms until 2050 and steeper increases after that.

Such a carbon tax is, of course, intended to correct for the external harms of global warming.

But Nordhaus isn’t the only person working to produce such inconvenient truths. There’s a whole slew of estimates of the social cost of carbon. Toward the other end of the spectrum is (Stern and others 2007) which estimates a social cost of carbon around \$340 per tonne. Because global warming plays out over decades and centuries, 2 is one of the key determinants of the final number.