David R. Henderson  

Response to Professor Stephen Gordon

My paper at the monetary rules... Solve for This Equilibr...

Last month, I posted about Professor Stephen Gordon's confusion between a tax and a price. Professor Gordon responded, and I responded to him. Here's an excerpt from my response:

Both Foster and I noted that there is an important distinction between a tax and a price. Professor Gordon is right that a tax on carbon affects the price of carbon--neither Foster nor I had ever maintained that it didn't.

But that doesn't mean that a tax is the same as a price.

And if Professor Gordon was trying to persuade readers that he sees the difference, he has failed miserably. Indeed, his response suggests that he comes close to equating the two.

Read the whole thing, which isn't long.

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COMMENTS (7 to date)
RL Styne writes:

"A market price is what a consumer has to pay in order to purchase a good or service. In contrast, a tax is, er, what a consumer has to pay in order to purchase a good or service.

This is one of those cases of a distinction without a difference."

Wow, that is just terrible. Not being an environmental economist, I wasn't sure how ingrained the Pigovian mindset is in their side of the profession. This is eye opening.

ThaomasH writes:

Of course as there is not market in CO2 emissions, there being no owner of the atmosphere that could buy and sell rights to emit substances, a tax on the carbon content of fuels cannot be the exact same thing as a price for CO2 emissions that might be established in a market for it.

The important point is what better way exists to ensure that net emitters of CO2 pass on through prices to the users of the goods and services produced with CO2 emitting processes the costs imposed on other economic actors of CO2 accumulation in the atmosphere?

Charlie writes:

This would be a cheap shot anyway:

"Does his silence on this issue mean he concedes my point? I believe it does."

But it's an especially a cheap shot given that Gordon's response was directed toward Peter Foster and toward you only in that your criticism at one point intersected with his.

MikeP writes:

The important point is what better way exists to ensure that net emitters of CO2 pass on through prices...

No. In this case the important point is whether one is intentionally obfuscating what may be an unpopular position by calling a tax a price.

It's equivalent to the annoying tendency of so many in the media to call cap-and-trade "market-based". It isn't. You can call it a manufactured market or perhaps a pseudo-market. But it is far more accurate to call cap-and-trade "mandate-based" since, without the mandate, no one would participate in the manufactured pseudo-market.

Nick writes:

So what is a price then?

Stephen Gordon's usage seems consistent with the way it's used in the economics profession and colloquially.

There are many taxes, such as lump-sum taxes, which would be inappropriate for carbon; the real purpose of a carbon tax is to price the pollution it produces, that is, raise the marginal cost to consumers. This is not unusual terminology, this is standard, and so it's incumbent on you to explain why we should use words differently. I don't see where you've explained this in either response.

You raise a separate issue, that using the term 'price' instead of 'tax' may be an attempt to make a carbon tax more palatable. Perhaps it is, and so what? It's called rhetoric.

But Stephen Gordon's somewhat bewildered response suggests to me that in fact he was just using the standard terminology which he's used to.

David S writes:

To me, the difference seems to be:

* A price is what you pay if YOU decide you want something.

* A tax is what you pay if OTHERS decide you should.

If you don't pay a price, nothing happens, you just don't get the service. If you don't pay a tax, someone threatens to shoot you, or shoots you.

In the specific case of a carbon tax:

* A price is what you pay if YOU decide you want something.

* A tax is what you pay if OTHERS decide you should, after you have already made the purchase.

Basically, people spent a lot of capital creating value for society because the price signals told them to. Then, after the investment, others decided to raise the "price" retroactively. I believe raising "prices" retroactively makes them not prices in the economic sense.

Nick writes:

@David S

My direct reaction to your definition is that under this definition, a sales tax is not a tax, but a price, since I only pay the sales tax if I decide I want to buy something. And if a court orders me to pay damages to some other party as the outcome of a civil lawsuit, that is classified as a tax. It's also doubtful to me that under your definition a carbon tax is not a carbon price, as you claim, since after all, even though as a factory owner I've invested in capital, I'm still not compelled to emit carbon, I do it only if I want to.

Economists use 'tax' to refer to an umbrella of policy instruments the government has available which involve transferring wealth to the government. And in my experience, they use 'price' to mean the cost per unit. This is also consistent with colloquial usage.

So that, for example, in Econ 101, we teach that after the government imposes a per-unit tax in a market, there is now a price to consumers and a price to producers, each of which includes part of the tax. There are lots of markets which are centrally organized, such as happens in clearinghouses through auctions or market makers; in these cases we say the central authority is 'pricing' goods in the market, even though some market participants may have committed before the fact to purchase some goods.

There are even situations where we talk about prices when it's not possible to actually buy or sell anything: 'shadow' prices. For example, Soviet Russia had a domestic shadow price for oil, the marginal economic cost of producing that oil.

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