warming is happening, let alone what the costs might be, or, many steps beyond
that, what the real cost of driving a Hummer for a mile might be. Is the right tax
$0.75, $2.21, $3.07? You will never get a group of scientists to agree on that, let
alone the Congress of the United States. There is an equity problem, too. I have
stipulated correctly that if we raise the cost of driving gas guzzlers, then those
who value them most will continue to drive them. But our measure of how much
we value something is how much we are willing to pay for it—and the rich can
always pay more for something than everyone else. If the cost of driving an
Explorer goes to $9 a gallon, then the people driving them might be hauling
wine and cheese to beach parties on Nantucket while a contractor in Chicago
who needs a pickup truck to haul lumber and bricks can no longer afford it. Who
really “values” their vehicle more? (Clever politicians might get around the
equity issue by using a tax on gas guzzlers to offset a tax that falls most heavily
on the middle class, such as the payroll tax, in which case our Chicago
contractor would pay more for his truck but less to the IRS.) And last, the
process of finding and taxing externalities can get out of control. Every activity
generates an externality at some level. Any thoughtful policy analyst knows that
some individuals who wear spandex in public should be taxed, if not jailed. I live
in Chicago, where hordes of pasty people, having spent the winter indoors on the
couch, flock outside in skimpy clothing on the first day in which the temperature
rises above fifty degrees. This can be a scary experience for those forced to
witness it and is certainly something that young children should never have to
experience. Still, a tax on spandex is probably not practical.
I’ve wandered from my original, more important point. Anyone who tells you
that markets left to their own devices will always lead to socially beneficial
outcomes is talking utter nonsense. Markets alone fail to make us better off when
there is a large gap between the private cost of some activity and the social cost.
Reasonable people can and should debate what the appropriate remedy might be.
Often it will involve government.
Of course, sometimes it may not. The parties involved in an externality have
an incentive to come to a private agreement on their own. This was the insight of
Ronald Coase, a University of Chicago economist who won the Nobel Prize in
1991. If the circumstances are right, one party to an externality can pay the other
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