Saturday, March 9, 2013

A Pigouvian Tax

The New York Times reported that Atlanta area residents were to vote on a penny to the sales tax to reduce road congestion in the Atlanta area.  This is similar to a Pigouvian tax, except this is a tax on the value-added as opposed to the amount of output.  While not perfectly equal, the implications are similar.

Economists in general are not big fans of taxes.  Not just because many of us are cheap, but because taxes reduce overall economic well-being.  Here is an exception.  Since congestion acts like pollution, in that congested roads increase costs to others, one way of getting those that are increasing the costs to others to take into account their actions, is to make (tax) this increasing cost behavior.  Here it is by taxing those in the Atlanta area more on sales tax, which is not perfect, but getting closer to a workable solution of road congestion.

Here is a similar argument from Robert Frank on Pigouvian taxes.

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