On Pigovian Taxes

In the previous post, I threw around the phrase "Pigovian tax" much too cavalierly. Looking at the external costs that an industry imposes on society, and then choosing a per-unit tax (so many cents per pound of meat, say, or a percentage tax imposed at the retail level) so that the tax revenues equal those external costs (and hence the consumers are now paying the full freight, as it were) is not equivalent to a Pigovian tax -- indeed, I expect that, in most circumstances, that procedure bears no relationship to a Pigovian tax.

To find a Pigovian tax, you should first identify all of the social costs and benefits associated with all potential levels of output of the good in question. The benefits typically are measured by consumer willingness-to-pay, and the costs are standard production costs (wages, prices of other inputs, rent on capital, and so on) as well as external non-monetized costs such as pollution or what have you (and any other adjustments where market prices for inputs do not reflect opportunity costs). Then you calculate the output level where the net benefit (all benefits minus all costs) are maximized, which typically is where marginal benefits equal marginal social costs. That output level is "socially optimal," producing more economic pie than any other output level. Having found the socially optimal output, you look at marginal social costs at that level of output and also the marginal costs actually facing private producers at that same output level. If there is a net negative externality, private marginal costs will be less than social marginal costs. The per-unit Pigovian tax, then, is given by the difference between these two marginal costs, measured at the socially efficient output. Such a tax (or the ad valorem version) does indeed bring home the full costs to the consumer, makes them pay the full freight of the goods they consume, but generally it has nothing to do with having tax revenues equal some level of external costs that were measured from the pre-tax status quo.

OK, even this more defensible use of the phrase "Pigovian tax" paints with pretty broad strokes, but I wanted at least to make some movement in the direction of accuracy.

As for the external costs associated with meat eating in the US, I believe that they are significant, even if we look only at the environmental subset of those costs. As soon as we treat harms to the animals themselves as cognizable costs (or even if we only count one-thousandth of those harms as social costs), then the size of the Pigovian tax is enormous -- indeed, it would be prohibitive, in that industrial farm operations as now undertaken in the US could not survive if animal harms were reflected in retail meat prices.

On Meatonomics, by David Robinson Simon

I am trying to put some thoughts together on meat taxation, so I thought a good place to start would be to comment a little bit on the 2013 book Meatonomics, by David Robinson Simon. The cover of Meatonomics includes the phrase "$414 Billion Reasons to Eat Less Meat," and the substance of the book explains where these extra (annual, 2012 dollars) costs of meat (not paid for directly by consumers or producers) come from; they are helpfully summarized in two pages (pp. 202-203) in Appendix B.

Kudos to Mr. Smith for taking on this ambitious task, and for documenting and attempting to quantify the many external costs of animal agriculture. The details undoubtedly are debatable, but what I take to be the main message -- there are huge external costs associated with meat, egg, fish, and dairy consumption in the US and that a significant tax on products containing these ingredients should be a major part of a set of policy reforms -- is one with which I agree. (And if you don't agree, your position might be altered by reading Meatonomics.)

Once the existence of sizable negative externalities is established, the economic case for corrective measures, including a so-called Pigovian tax, is fairly strong. Smith's $414 billion is more than 1.6 times consumer spending on animal foods, so a Pigovian tax would increase retail prices by something on the order of 2.5 times their existing (2012) level. [OK, this claim is actually a massive simplification or even distortion.] The higher retail prices would decrease the quantity demanded of animal foods, of course, but economic efficiency would be enhanced, as consumers began to shoulder the full social costs of their dining decisions. Mr. Smith does not propose a full Pigovian tax, however; instead, he suggests (page 172) a 50% ad valorem tax on domestic retail sales of animal-based foods, which would raise consumer prices for those products by something like 50%, too, presumably.

The precise nature of Mr. Smith's accounting of external costs is relevant for desirable policy reforms. First, some 9 percent of the external costs come in the form of subsidies to agriculture, including irrigation subsidies. (Since much of the corn crop is used for animal feed, subsidies to corn, for instance, end up supporting animal agriculture.) The externalities associated with these subsidies would best be handled by eliminating the subsidies (which are spread around to all the uses of corn, including ethanol), not through a meat tax. Second, the majority of the external costs come through impacts on health (especially increased heart disease), but it is not clear that these are externalities. (Some, such as building up of antibiotic resistance through farm antibiotic use, are classic externalities, however.) They are not direct physical externalities, like when your steel mill pollutes my air (or vice versa), but rather, they operate through the socialization of some healthcare costs -- the spillovers are financial, and would not exist if we chose not to provide some public subsidy to healthcare. Using such financial spillovers as justifications for further public interventions (here, a meat tax), is not necessarily a good idea. After all, once it is agreed that such externalities can drive policy, then any personal behavior (not getting enough exercise, say, or eating an extra dessert) seems ripe for public control: your irresponsibility is costing me money! This is not a road down which I am eager to travel, at least without a lot of consideration. (Though I do support some socialization of health care expenses -- I just don't want their availability to be made contingent on whether your behavior is judged to be sufficiently protective of the public purse.) Of course, even if there were no issues with fiscal spillovers, we should still be concerned with the health effects of consuming animal products or anything else. Do individuals understand the health risks they are running, or are these risks for some reason undercounted in individual decision making? That is, health risks can be internalities, even if they are not externalities, and taxes might be helpful to overcome internalities, too.

The environmental externalities identified in Meatonomics are, for the most part, good old-fashioned standard externalities, suggesting that the current size of the animal agriculture sector is socially excessive and a meat tax would move us in the right direction. Mr. Smith also notes the willingness-to-pay by people for less cruel methods of farming, so not only is there too much animal agriculture, it is insufficiently protective of animal interests -- even if those interests are directly ignored, and only taken into account through human willingness-to-pay.