An Economist's Invisible Hand

Discussion in 'Economy' started by midcan5, Dec 2, 2009.

  1. midcan5
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    midcan5 liberal / progressive

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    'Arthur Cecil Pigou, overlooked for decades, provides a guide to the financial crisis'

    "Mr. Pigou drew an important distinction between the private and social value of economic activities, such as the opening of a new railway line. The savings in time and effort that users of the railway enjoy are private benefits, which will be reflected in the prices they are willing to pay for tickets. Similarly, the railroad's expenditures on tracks, rolling stock, employee wages are private costs, which will help to determine the prices it charges. But the opening of the railway may also create costs for "people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines," Mr. Pigou pointed out.

    Such social costs—modern economists call them "externalities"—don't enter the calculations of the railroads or its customers, but in tallying up the ultimate worth of any economic activity, "[a]ll such effects must be included," Mr. Pigou insisted. In focusing exclusively on private costs and private benefits, the traditional defense of the free market misses out on a vital element of reality.

    To correct the problems that spillovers created, Mr. Pigou advocated government intervention. Where the social value of an activity was lower than its private value, as in the case of a railroad setting ablaze the surrounding woodland, the authorities should introduce "extraordinary restraints" in the form of user taxes, he said. Conversely, some activities have a social value that exceeds their private value. The providers of recreational parks, street lamps, and other "public goods" have difficulty charging people to use them, which means the free market may fail to ensure their adequate supply. To rectify this shortcoming, Mr. Pigou advocated "extraordinary encouragements" in the form of government subsidies."

    Arthur Cecil Pigou Provides a Guide to the Great Recession - WSJ.com
     
  2. Limey
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    Limey Member

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    Pigovian tax? There is of course a potentially important stumbling block offered by the Coase Theorem. The tax is designed to ensure consumers/producers face an optimal price. However, the Coase Theorem shows that the real problem is incomplete property rights. A tax, even if the government is perfectly informed, can therefore actually lead to a non-optimal result. Whilst it attempts to internalise externalities, it fails to recognise that mutually beneficial exchange is made possible by any distinction between marginal private costs and benefits. Bargaining effects corrupt the result
     

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