After yesterday’s rather spiritual post, it’s back to more earthly matters today. (On a slightly technical matter, though. I’ll try to mix some lighter stuff into this blog).
I’ve been reading some more of The Wisdom of Crowds and have come to a chapter on co-ordination problems. The author is talking about the London congestion charge. The theory is very simple, people drive through London because the benefits to them outweigh the costs. Trouble is, when enough people decide to drive, traffic jams ensue and everyone suffers. So, though a driver has weighed up the benefits and costs to themselves, a driver may impose costs on other drivers in the form of a jam. Because no single driver has to pay for the costs they impose on others, this cost (the jam) will appear far more often than any driver wishes*. Individually sensible decisions lead to a collectively stupid one. A solution, then, is to make each driver pay for this cost they impose on others – here by paying the congestion charge**.
This idea crops up in other situations. Pollution is an obvious one. If no one has to pay for the fumes they release into the atmosphere from their cars and factories, then a lot of fumes we’re gonna get. A solution here is then some tax or charge on pollution.
Similarly, one can justify the high duties paid on cigarettes and alcohol. They may fall on poorer people; but if they’re going to give themselves horrible diseases of the lungs and liver and expect other taxpayers to pay for their NHS treatment, it’s not only themselves they’re hurting.
Another example, which I haven’t seen discussed so much, is in the case of planning. New housing developments (or wind farms etc.) are often opposed by locals, who presumably object to the view, noise and congestion created. This is the cost imposed on others, which does not come into the private weighing up of benefits (jobs, homes, clean energy) versus costs (employing builders, buying materials).
Now don’t get me wrong; I think we get the balance very wrong. I believe we need to consistently build many more homes and move to cleaner forms of energy. But that argument won’t be won unless we find a way of compensating those people who object because costs are being imposed on them. (I actually have ideas of where this compensation can come from, but I’ll expand on that idea in a future post.)
** Getting technical, this is internalizing the externality. By making people pay the price of the externality the private cost will equal the social cost. The tax on the externality is a Pigovian tax, named after the economist who developed the idea.