Writing in The New Yorker, Elizabeth Kolbert illustrates the power of analogy:
A man walks into a bar. He orders several rounds, downs them, and staggers out. The man has got plastered, the bar owner has got the man’s money, and the public will get stuck with the tab for the cops who have to fish the man out of the gutter.
The man pulls into a gas pump. He sticks his BP or Sunoco card into the slot, fills up and drives off. He’s got a full tank; the gas station and the oil company share in the profits. Meanwhile, the carbon that spills out of his tailpipe lingers in the atmosphere, trapping heat and contributing to higher sea levels. As the oceans rise, coastal roads erode, beachfront homes wash away, and, finally, major cities flood. Once again, it’s the public at large that gets left with the bill.
In both cases, Kolbert endorses the “fair and logical” solution: The man should be taxed to incorporate the costs that his choices impose on the rest of society.
I like this game. Can I play too?
A man chooses to build his house on the oceanfront instead of 100 miles inland. This makes him especially vulnerable to rising sea levels and therefore leads him to lobby for a carbon tax. The man gets his house; the builders and contractors share in the profits, and the public at large bears the consequence of higher gas prices.
Some people want to burn a lot of carbon, which raises global temperatures, imposing costs on owners of oceanfront property. Other people want to protect their oceanfront property, imposing costs on the people who want to burn a lot of carbon. A journalist at the New Yorker convinces her readers that the only “fair and logical” solution to this conflict of interests is to come down entirely on the side of the property owners, leading to the implementation of suboptimal policies. The journalist gets paid, the magazine editors congratulate themselves on the influence of their writers, and the general public suffers the consequences.
Should the property owner and the journalist be taxed for exerting their malign influences?
To bolster her position, Kolbert invokes the authority of Arthur Cecil Pigou. This is much like invoking the authority of Isaac Newton to prove that “absolute, true, and mathematical time, of itself, and from its own nature, flows equably without relation to anything external”, or invoking the authority of Bertrand Russell to prove that mathematics is a branch of logic.
Like Newton and Russell, Pigou was a brilliant and innovative thinker who vastly improved on the analysis that preceded him. Like Newton’s and Russell’s, Pigou’s analysis was ultimately superceded by better analysis — i.e. analysis that is universally acknowledged to be better by virtually every single person who has worked in the field. As Einstein was to Newton, as Godel was to Russell, so Coase was to Pigou.
Coase’s key insight is that all of these externality problems are fundamentally symmetric. The question is never “how do we stop A from harming B?” but instead “should we let A harm B, or should we let B harm A”? A consequence of that symmetry is that no abstract principle — including the abstract principles that guided Pigou and still guide Kolbert — can possibly be used to guide policy. Any purely abstract argument for preventing harm from A to B is an equally good argument for preventing harm from B to A.
Kolbert seems to believe that Pigou settled this question 100 years ago. So he did, just as Newton settled the issue of absolute space. But we now know that Pigou was wrong (although his insights laid the indispensable foundation for later, better insights).
Should we tax the man who comes out of the bar and passes out in the gutter? Maybe. But if your only argument is that the man should not be allowed to harm the rest of us at no cost to himself, then your argument also shows that we should not be allowed to harm the man (by taxing him) at no cost to ourselves. Should we tax the man who drives a gas guzzler? Maybe. But if your only argument is that gas guzzlers cause harm to others, you’ve got to face the fact that taxes also cause harm to others.
In other words, settling this important policy question is going to take much better arguments than Kolbert has to offer. What’s dismaying to this professor is not just that she’s got it wrong, but that she’s so sure she’s got it right.