Arnold Kling  

The Pigou Club's Powerful Members

Avoiding Truth... Telling Bias Stories...

Ron Bailey writes,

77 percent of the world’s known oil reserves are in the hands of state-owned oil companies. Such “companies” do not respond with alacrity to market signals and so are under-investing in new production technologies and even in maintaining the production facilities that they currently have.

The countries with nationalized oil resources siphon the money to pay off key constituencies. You can think of this as an enormous tax on oil production. As with any such tax, it lowers quantity supplied and drives up the price. The members of Greg Mankiw's Pigou club, who want to see high oil-related taxes, might be pleased. (Of course, Pigou club members might still prefer to see the U.S. levy a high tax, in order to transfer income away from the autocracies and toward the U.S.)

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COMMENTS (2 to date)
Michael Sullivan writes:

The problem is that to the extent that the wealth taken in Pigovian taxes is destroyed (rather than invested or saved for remediation, or even just randomly distributed), even optimal pigovian taxes do not improve world wealth. (I credit Patri Friedman for this observation, though I don't have a link handy)

So if we put a tax on gasoline and used that to reduce the deficit or cut other (more distortionary) taxes. That would be a good thing. If we simply took the revenue and gave it a bunch of lucky plutocrats to do with as they would, it would end up back in the economy in some fashion (investment or consumption) and even that would be a good thing.

But if we spent the money employing people to build bridges to nowhere, or buying resources that get destroyed, then the tax makes us on the whole worse off, despite making the market for oil more sane.

Unfortunately, the governments Ron is talking about, are largely wasting the resources generated by their rear-end pigovian strategies, so while these actions may have a positive effect on the oil markets, it's probably well outweighed by the damage these policies are doing to their oil industry and overall economies.

If a relatively less socialist or plutocratic government (such as the US) were to collect oil or gas taxes, the dead-weight loss would be smaller, probably leaving the pigovian effect big enough to justify them. Or at least you will agree with that last if, like me, you are in sympathy with the Pigou Club.

Pigou Club writes:

It would be best if oil was subject to free market forces and later taxed in the US.

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