Monday, September 8, 2008

Pigovian Taxes

Greg Mankiw has an excellent article on why gas taxes should be higher. I'm inclined to agree with him. In fact the majority of economists support the notion of Pigovian taxes on gasoline. These are taxes that are used to correct some externality generated by consumption. In the case of gasoline, the externalities are pollution, congestion, climate change etc.

Mankiw also explains why cap and trade policies are inferior to a simple carbon tax. The primary reason being that the revenue from the carbon tax can be used to offset the tax burden - for example - it can be used to reduce payroll taxes.

Primary opposition for carbon taxes come from politicians - but as Mankiw points out; just because they oppose a carbon tax - doesn't mean that carbon taxes are a bad idea.

Anyhow, it is an excellent read for both economists and non-economists alike.

Hat tip goes to the Freakonomics blog where I saw this posted.