The costs to society caused by the consumption or production of goods that are not incorporated into the price of the goods, such as those of pollution or shortage of resources are called external diseconomies. The Pigovian tax internalizes this externality inside the market. For example, if producers do not bear the cost of garbage disposal, they will produce more than socially necessary. If the cost is included in the price of products beforehand, it will reduce the supply to a socially desirable amount. Thus, the Pigovian tax can achieve Pareto optimum, the most efficient allocation of resources whose utility cannot increase without decreasing anyone’s utility.
1. Why is the Pigovian Tax necessary?
Those influenced by Hayek assert that environmental pollution is not market failure but Government failure, because, if individuals persist in their private properties and do not depend on the irresponsible Government, they endeavor to protect their environments of themselves without Government interference. It is, however, too late when individuals find themselves the victims of environmental pollution and sue for damages. We should take a preventive measure through Government.
In this article, I suggest a Pigovian tax to promote not recycling but reuse and reduction of goods.
In Japan when consumers discard some kinds of household electrical appliances, they are to pay the costs to recycle them on and after April 2001. This recycling law has two problems.
First, promoting material recycling often causes environmental pollution and waste of resources as pointed out at the previous issue.
Second, charging for waste motivates consumers to abandon waste illegally or incinerate it privately. Burning garbage in a small home incinerator emits harmful dioxin or hydrogen chloride because of low-temperature combustion and, needless to say, illegal abandonment of garbage also destroys environment.
In order to prevent such illegal abandonment and private incineration, waste-processing expense should be collected as a Pigovian tax in the stage of production instead of collection from consumers in the stage of abandonment and put out to competitive bidding.
This way, even if a producer goes out of business, its products can be disposed of at the producer’s burden and competitive bidding weeds out inefficient recycling. Of course, Government has to superintend processing contractors so that the pursuit of efficiency may not drive them to take illegal measures.
Another merit of Pigovian tax is that it can restrain harmful substances in the stage of production. In the stage of disposal, it is unclear how much harmful substances the waste includes. If high tax is levied on harmful substances, the chemical industry will develop substitutes for them. When they succeed in developing harmless substitutes, Government can prohibit the use of the harmful substances.
As reuse is more important than recycling, I propose introducing the Pigovian tax into promoting reuse. In advanced countries, many products are discarded in the shorter term than a potential life. Although producers and media that stir consumers to follow the latest fashion might be to blame for it, the biggest problem lies in the price system where buying a new product is more advantageous than repairing an old one.
2. Does the Pigovian tax sacrifice economy?
We should institute a new price system where possible costs necessary to repair products are levied as a Pigovian tax so that consumers can repair products without any fee for a standard life of it. This Pigovian tax will raise the price of goods, but it is not a demerit to consumers, who can use them for a long time. It is producers who suffer damage. There are many people who are worried that the Pigovian tax might reduce consumption and exert a bad influence on economic growth. Are economic growth and environmental protection in the relation of trade-off?
In the industrial society where atom-type goods (for example automobiles) were typically produced, there was strong positive correlation between economic growth and environmental destruction, and GNP (Gross National Product) was often called Gross National Pollution. In the information society where bit-type goods (for example software) are typically produced, there is only weak positive correlation between economic growth and environmental destruction. It costs physically a little to produce or dispose of bit-type goods saved on a magnetic medium.
In the industrial society economical growth usually exhausts resources and causes inflation, but US, the center of the information revolution, succeeded in growing with little inflation. This is because the New Economy is more energy saving than the Old Economy.
3. Educational expenses as a Pigovian tax
Population should be reduced by means of investing in education in order to solve the resources and environmental problem and this proposal is available also here, because the investment in education increases intellectual workers and the knowledge-intensive economy enables economic growth with little inflation.
Burdening parents with education costs is another kind of Pigovian tax to reduce energy demand. If the Government subsidizes the expense of bringing up children, more children will be born than is necessary and permissible to prevent environmental destruction.