Bryan Caplan  

Fixed Costs: The Moderate Case for Extremism

Carbon Tax Club?... Jason Furman x 2...

Does cost-benefit analysis always council against extremism? In a reply to Arnold, Mankiw seems to argue that it does:

I am not a scientist and am therefore agnostic about a lot of issues surrounding global warming. Suppose I assign a probability p that Al Gore is right. The optimal policy from my perspective is not to oppose a carbon tax unless p exceeds some threshold. Instead, the optimal tax is increasing as a function of p and is positive for any p>0. A person who thinks p is small would not want a big carbon tax but should endorse a modest one.

But what if there is a fixed cost of having a carbon tax in the first place? For example, the net expected benefits could be:

-$1,000,000 + $10,000,000*p

The $1,000,000 might be the overhead of the carbon tax collectors, or the costs of every tax-payer who has to fill out a carbon tax form, or what have you. Given this fixed cost, for p<.1, the net expected benefits of a carbon tax are negative. On efficiency grounds, Arnold would be correct to council inaction until p exceeds that threshold.

Every micro textbook tells us that when the price of a good gets so low that firms can't recoup their fixed costs, it makes sense to simply close up shop - or not open in the first place. The same goes for government programs.

Comments and Sharing

COMMENTS (2 to date)
Nathan Smith writes:

Don't we have a gasoline tax already? And why is coal consumption hard to tax? I don't see where the overhead is coming from.

xmath writes:

Oh for crying out loud. You don't even need to get into fixed costs. Just ask yourself this: by the same token what if global warming would be a net positive? Mankiw's not a scientist but he's "agnostic" (so he says) on these issues, and so he can't discount the possibility. Therefore he must assign it a probability q. But then for expected benefits we've got an expression of the form


and... where does that lead us? Nowhere, unless you start making assumptions about the relative sizes of p, q, A, B. In other words, unless you're not really as "agnostic" as you claim to be.

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