DOCSLIB.ORG

Experiments and the Land

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Experiments and the Land An Experimental Economics Investigation of the Land Value Tax: Efficiency, Acceptability, and Positional Goods Joshua M. Dukea,*, TianHang Gaoa September 18, 2017 aDepartment of Applied Economics and Statistics, University of Delaware, 531 S College Ave, Newark DE 19716 *Corresponding author. E-mail addresses: [email protected], [email protected] Acknowledgements The authors are grateful for funding from the Lincoln Institute of Land Policy and support from its fellows and staff members, including Joan Youngman, Semida Munteanu, and Mark Skidmore. The authors appreciate the helpful feedback from the participants at the 2016 David C. Lincoln Fellowship Symposium. The authors thank Emerson Paradee, Xingguo Wang, and Greg Vitz for assistance with administering the experiments. Abstract This research offers the first economic experiment investigating the land tax, where landowners invest under different property tax regimes. A voting treatment assesses the relative acceptability of land value taxation. Results show a land tax produced greater overall welfare in only 37.5% of the experiment sessions. Systematic over-investment arises from the positional- good characteristic of residential land investment, but this effect vanishes when the positional- good indicator is removed. The experiments show that the participants unexpectedly voted in favor of the land tax, suggesting that the efficiency and acceptability of the land tax may be more complex than in non-behavioral economics modeling. JEL Classification: C91; H21; H31; H71 C91, Design of Experiments--Laboratory, Individual Behavior; H21, Taxation, Subsidies, and Revenue-- Efficiency • Optimal Taxation; H31, Fiscal Policies and Behavior of Economic Agents-- household; H71; State and Local Taxation, Subsidies, and Revenue Keywords: Land Use, Behavioral Economics, Taxation 1. Introduction Economists famously led by Henry George have argued in favor of a pure land value tax (LVT) or its close cousin, a split-rate tax (SRT), in part because they encourage land investment and raise revenue for public goods without distortions. As a fixed resource, land will capitalize locational benefits collectively supplied. Targeting these rents with a land tax will not distort the incentive to invest in parcel improvements, as does the ubiquitous uniform property tax (UPT) that taxes improvements and land equally. Most of the recent work on George focuses on theoretical and simulation models of optimal city size (c.f., Behrens et al. 2015). This paper seeks to complement those studies with the first economic lab experiment on how property taxation affects household investment. The data explore three dimensions of the relative performance of the land tax, including the investment incentives, wealth created, and political acceptability. The experiment also explores a new possibility in land value tax research; land value taxation can exacerbate the positional goods characteristics of housing and produces lower aggregate welfare through overinvestment. The efficiency of land taxation has been assessed using simulated general equilibrium models of open and closed cities and a handful of empirical studies. Some of the results show that LVT generates more intensive capital investments in land (Pollack and Shoup 1977; Plassmann and Tideman 2000; Banzhaf and Lavery 2010). Other land tax benefits, including attenuated tax distortions and increased investment, have also been explored under a system of inaccurate assessments with positive results found for LVT (Chapman, Johnston, and Tyrrell 2009). Several studies examine whether the ostensibly progressive land tax may be regressive through a tax regime change in real-world settings (England and Zhao 2005; Bowman and Bell 2008; Choi and Sjoquist 2015). Prior results show that LVT can provide sufficient revenue 1 (DiMasi 1987) and can increase density in cities (Brueckner and Kim 2003; Banzhaf and Lavery 2010; Choi and Sjoquist 2015). In reaction to this wealth of theory and evidence, Fischel (2015, p. 15) asked: “If economists like (the land tax) so much, why does it seem so rare in practice?” The land tax must be politically unacceptable or practically un-implementable. Research on Pennsylvania’s efforts suggests although SRT led to greater efficiency, few municipalities have adopted the tax and, surprisingly, some LVT adoptees are returning to UPT (Fischel 2015, pp. 16-17; Banzhaf and Lavery 2010). Youngman (2016, p. 18) writes that land taxes have suffered from both “administrative failures” and a “lack of political support.” Bourassa (2009, p. 195-6) identified five objections to the land tax; three reasons involve planners’ professional challenges such as difficulty to set rates, adjusting zoning to prevent too much density, and educating the public about land taxation. Bourassa also identified two economic challenges from land taxation, which will be addressed in this paper: (1) it is a tax on unrealized capital gains, that is, wealth rather than cash flow; and (2) it is a policy change that creates winners and losers, and losers will object. That LVT taxes unrealized capital gains may lead some to object on ethical or economic grounds—especially as it contrasts with most taxes that are levied on transactions. The fact that most of the United States currently raises local revenue with UPT means that a switch to LVT would be a policy change, which unavoidably would create policy losers; Plummer (2009) explored these horizontal and vertical inequities in tax incidence and LVT acceptability with both qualitative arguments and numerical examples. In sum, these studies suggest that acceptability depends on more than arguments about social efficiency or tax progressivity. This paper extends these behavioral arguments about LVT acceptability by introducing another challenge to land taxation: positionality. Housing has long been recognized as a 2 positional good (Veblen 1899; Frank 1985a,b; Hirsch 1977). When a good has positionality, consumer spending will be affected by interpersonal comparisons (Frank 1985b). Recent work by Patacchini and Venanzoni (2014) finds a significant effect from social comparison and a conformity peer effect in shaping the demand for housing quality. One implication of these findings is that one’s housing improvements can cause a negative externality for neighbors, causing neighbors to overinvest to re-attain their prior level of housing utility. Housing utility is derived in the context of one’s neighborhood, and this can lead to an expenditure cascade: “a process whereby increased expenditure by some people leads others just below them on the income scale to spend more as well, in turn leading others just below the second group to spend more, and so on” (Frank, Levine, and Dijk 2014, 57). This paper argues that LVT efficiency and acceptability ought to be complicated by positionality. The equity of LVT depends on (1) whether those similarly situated in society are treated “the same” or “the same enough” to satisfy norms of fairness; and (2) whether those differently situated accept their differential burdens. Tax equity associated with cash flow, or income, is easier for the general public to observe and understand. Land capital inequities introduce a second “wealth” dimension upon which a tax policy is evaluated, and imperfectly observed. The public will likely be skeptical of LVT because it is more difficult to observe land capital differences and yet the tax rates will be “the same” and perceived to be vertically inequitable, on the face. As Fischel (2015, p. 17) explained, Pittsburgh rolled back its SRT system when people rejected the idea that owners in the same neighborhood pay the same taxes even when their houses are of different sizes. In other words, LVT does not seem vertically equitable because “people in larger houses should pay proportionately more” (Fischel 2015, p. 17), but they do not. LVT acceptability therefore conflates with the positional-goods aspect of 3 housing, and this produces an obstacle for acceptance for which behavioral economics are well positioned to explore. The contribution of this work arises from using behavioral economics to analyze the efficiency of LVT, the positional-goods characteristics of housing, and the acceptability of LVT. To our knowledge, this is the first economic experiment on LVT. Another innovation in this experiment is that it makes endogenous the process by which land values appreciate; therefore, capturing the fundamental rationale behind a Georgian land tax—to capture the rent imbued by location. The treatments test (1) the social efficiency of LVT and SRT relative to UPT, or status quo, baseline; (2) the effect of a positional-goods signal on investment behavior; and (3) the public acceptability of the LVT and SRT relative to UPT using a voting mechanism. Experiment participants will take on the roles of different types of landowners making decisions about investing in their property (termed “improvements” in this experiment). Experimental economics techniques are ideally suited for studying LVT because there are limited instances of its adoption, the few examples of adoption of LVT is often incomplete (as SRT), actual LVT policies do not vary as much as might be desired in empirical analysis, implementation is complicated by inaccurate assessments, and any one location only has one policy treatment. Lab experiments with induced values overcome all of these shortcomings, providing the researcher with control and allowing analyses that test causal hypotheses. Furthermore,
Load more

Recommended publications
  • A Pigovian Approach to Liquidity Regulation
    “IJCB-Article-1-KGL-ID-110007” — 2011/10/18 — page3—#1 ∗ A Pigovian Approach to Liquidity Regulation Enrico Perottia and Javier Suarezb aUniversity of Amsterdam, De Nederlandsche Bank, and Duisenberg School of Finance bCEMFI and CEPR This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price ver- sus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and pre- serving credit quality, while quantity-based funding ratios are distortionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk-shifting incentives under control. In general, an optimal policy should involve both types of tools. JEL Codes: G21, G28. 1. Introduction The recent crisis has provided a clear rationale for the regulation of banks’ refinancing risk, a critical gap in the Basel II framework. This ∗We have greatly benefited from numerous discussions with academics and pol- icymakers on our policy writings on the regulation of liquidity and on this paper. Our special thanks to Viral Acharya, Max Bruche, Willem Buiter, Oliver Burkart, Douglas Gale, Charles Goodhart, Nigel Jenkinson, Laura Kodres, Arvind Krish- namurthy, David Martinez-Miera, Rafael Repullo, Jeremy Stein, and Ernst- Ludwig von Thadden for insightful suggestions and comments.
    [Show full text]
  • Internalizing Externalities in Second-Best Tax Systems*
    Published in: Public Finance 51.1996, pp. 242-257 Internalizing Externalities in Second-Best Tax Systems* Gerhard O. Orosel University of Vienna and Ronnie Schöb University of Munich JEL classification: H21, Q28 ABSTRACT We examine the analytical structure of optimal taxation of polluting and non-polluting goods in a second-best world where lump-sum taxes are infeasible. After deriving a second-best internalization tax rate which exactly internalizes the external effect, we show how to separate the analysis of second-best optimal environmental taxes from the analysis of the tax structure which minimizes the excess burden. This separation reveals that standard results of optimal taxation essentially carry over to economies with externalities. Our approach clarifies the controversy regarding the relation between the first-best Pigovian tax rate on polluting goods and the optimal tax rate in a second-best world. Addresses: Gerhard O. Orosel Ronnie Schöb Department of Economics Department of Economics University of Vienna University of Munich Bruenner Strasse 72 Schackstrasse 4 A-1210 Vienna D-80539 Munich Austria Germany tel. ++431/29128-781 tel. ++49/89/2180-6261 fax ++431/29128-569 fax ++49/89/397303 [email protected] [email protected] * Helpful comments by Clemens Fuest, Clemens Puppe, and Marcel Thum are gratefully acknowledged. The usual disclaimer applies. 1 I. Introduction We examine the problem of the optimal taxation of polluting and non-polluting goods in a second-best world where lump-sum taxes are infeasible. The analysis is based on the derivation of the "second-best internalization tax" which in a second-best environment of distortionary taxes exactly internalizes the external effect associated with a particular good.
    [Show full text]
  • Bargaining Solutions to Externalities. Michael Thomas Maloney Louisiana State University and Agricultural & Mechanical College
    Louisiana State University LSU Digital Commons LSU Historical Dissertations and Theses Graduate School 1978 Bargaining Solutions to Externalities. Michael Thomas Maloney Louisiana State University and Agricultural & Mechanical College Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_disstheses Recommended Citation Maloney, Michael Thomas, "Bargaining Solutions to Externalities." (1978). LSU Historical Dissertations and Theses. 3288. https://digitalcommons.lsu.edu/gradschool_disstheses/3288 This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Historical Dissertations and Theses by an authorized administrator of LSU Digital Commons. For more information, please contact [email protected]. INFORMATION TO USERS This was produced from a copy of a document sent to us for microfilming. While the most advanced technological means to photograph and reproduce this document have been used, the quality is heavily dependent upon the quality of the material submitted. The following explanation of techniques is provided to help you understand markings or notations which may appear on this reproduction. 1.The sign or “target” for pages apparently lacking from the document photographed is “Missing Page(s)” . If it was possible to obtain the missing page(s) or section, they are spliced into the film along with adjacent pages. This may have necessitated cutting through an image and duplicating adjacent pages to assure you of complete continuity. 2. When an image on the film is obliterated with a round black mark it is an indication that the film inspector noticed either blurred copy because of movement during exposure, or duplicate copy.
    [Show full text]
  • The Effectiveness and Rightfulness of Tax on Sugary Beverages in Thailand
    The Effectiveness and Rightfulness of Tax on Sugary Beverages in Thailand Master Thesis International Business Law Author: Panuwud Wongcheen SNR: U736075 Master: International Business Law (LLM) Year: 2018-2019 Supervisor: Paul Obmina Abstract In 2017, Thailand started to imposed tax on sugary beverages from the concerns of the rise of obesity among adults, children, and monks. While other jurisdictions usually set the tax by volume-based, Thailand sets the tax based on sugar content in each beverage ranging approximately from 1-10percent of the price of the product. The tax is only imposed on the natural sugar-sweetened products; thus, artificial sweeteners can be used without any tax imposing on. Dairy products such as fresh milk, flavored milk, and yogurt drinks are exempted. The sweeter the product is, the more tax it has to pay. However, the weaknesses in achieving the obesity reduction goal still exist. It is true that when the consumer would avoid sweeter beverages and swap to the less sweet product. However, when the consumer drinks two bottles of less sweet products, the sugar which he receives could be more than one bottle sweet product. The consumer should consume less sugary beverages due to the higher price regarding the rational choice theory and other economic theories. However, there has been no evidence reporting the successfulness in any jurisdictions in the long term. This thesis will analyze what are the commonalities between each jurisdiction, the mutual overlook aspects and suggest the improvements that it should take into consideration. The rightfulness of tax is likely to be not. When the government enacts regulations, which impact rights and liberties of the people with the police power, it needs to comply with provisions under the constitution.
    [Show full text]
  • The Economics of Climate Change C 175 ‐ Christian Traeger Part 3: Policy Instruments Continued
    The Economics of Climate Change –C 175 The Economics of Climate Change C 175 ‐ Christian Traeger Part 3: Policy Instruments continued Standards and Taxes Lecture 10 Read: Parry, I.W.H. & W.A. Pizer (2007), Emissions Trading versus CO2 Taxes, Resources for the Future. Spring 09 –UC Berkeley – Traeger 3 Instruments 18 The Economics of Climate Change –C 175 Command and control (Standards) Past environmental policy largely based upon direct regulation, or command and control (CAC) Input control: ban on certain toxic inputs Output control: each firm not allowed to emit more than X tonnes of pollutant Y Technology control: requirement to use particular method or technology (ege.g. BATNEEC= Best Available Technology Not Entailing Excessive Cost) Information requirement for static cost‐effectiveness: government must know exact marginal costs of emission reduction of EVERY firm: not feasible Suppose government dictates emission reduction (output control) to 2 firms that differ in marginal abatement cost (MAC) functions, where MACs are not equalize d Spring 09 –UC Berkeley – Traeger 3 Instruments 19 The Economics of Climate Change –C 175 Command and control • Recall that efficiency requires that MAC equal over all firms MAC1 MAC2 MAC2 MAC1 a f b g c e d * 0 R R1 1 R1 * R2 R2 R 2 0 Spring 09 –UC Berkeley – Traeger 3 Instruments 20 The Economics of Climate Change –C 175 Command and control MAC1 MAC2 MAC2 MAC1 a f b g c e d 0 R * 1 R1 R1 R R* R2 2 2 0 • At R R* ;R R* total costs are c + d + e 1 1 2 2 Spring 09 –UC Berkeley – Traeger 3 Instruments
    [Show full text]
  • Econometrica, 48, 56--73. 29
    Econometrica, 48, 56--73. 29 Bergstrom, T., Blume, L., and Varian, H. (1986). On the private provision of public goods. Journal of Public Economics, 29, 25--49. Clarke, E. (1971). Multipart pricing of public goods. Public Choice, 11, 17--33. Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1--44. Crawford, V. (1979). A procedure for generating pareto efficient egalitarian-equivalent allocations. Econometrica, 47, 49--60. Groves, T. (1976). Information, incentives, and the internalization of production externalities. In Lin, S. (Ed.), Theory and Measurement of Economic Externalities. Academic Press, New York. Groves, T. (1979). Efficient collective choice when compensation is possible. Review of Economic Studies, 46, 227--241. Groves, T., and Ledyard, J. (1977). Optimal allocations of public goods: A solution to the `free rider problem'. Econometrica, 45, 783--809. Groves, T., and Ledyard, J. (1987). Incentive compatibility since 1972. In Groves, T., Radner, R., and Reiter, S. (Eds.), Information, Incentives and Economic Mechanisms. University of Minnesota Press, Minneapolis. Guttman, J. (1978). Understanding collective action: Matching behavior. American Economic Review, 68, 251--255. Hurwicz, L. (1979). Outcome functions yielding Walrasian and Lindahl allocations at Nash equilibrium points. Review of Economic Studies, 46, 217--225. Jackson, M., and Moulin, H. (1992). Implementing a public project and distributing its cost. Journal of Economic Theory, 57, 125--140. Maskin, E. (1985). The theory of implementation in Nash equilibrium. In Hurwicz, L., Schmeidler, D., and Sonnenschein, H. (Eds.), Social Goals and Social Organization, pp. 173--204. Cambridge Univeristy Press, Cambridge. Moore, J. (1991). Implementation in environments with complete information.
    [Show full text]
  • Pigouvian Principles of Externalities and Cap and Trade
    Pigouvian principles of externalities and cap and trade Remarks Delivered before 2014 A&WMA Conference October 29, 2014 Dr. Joseph R. Mason EPA ozone policy – and environmental policy, generally, is a mix of Pigouvian principles and policy objectives. But the combination of those can have unanticipated distortionary effects. To begin with, it is important to understand the economic nature of the problem of externalities. In the graph, the market equilibrium obtains at the intersection of marginal benefits and marginal costs. But with externalities, the marginal social cost is greater than the marginal personal cost, reflecting the fact that the externality affects others more than oneself. Since the marginal personal cost of the activity is lower than the social cost, more persons consume the good at a lower cost than if the two marginal costs were the same. 1 The policy issue, therefore, is how we price to the marginal social cost in order to reduce consumption. The solution originally offered by Arthur Pigou in his 1920 work The Economics of Welfare. In that work, Pigou recommended that consumption be taxed so that the price of the good rose, with the goal that the price and quantity of consumption reach P-star and Q-star, the non-externality equilibrium. In that case, the personal marginal cost would equal the social marginal cost so that the consumer would bear the full cost of the externality. The problem, of course, is that in order to use this framework for policy one must settle on Q-star and/or P-star in order to set the policy goal.
    [Show full text]
  • Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer University of San Diego School of Law
    University of San Diego Digital USD Law Faculty Works Law Faculty Scholarship 11-23-2015 Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer University of San Diego School of Law Follow this and additional works at: http://digital.sandiego.edu/law_fac_works Part of the Tax Law Commons Digital USD Citation Fleischer, Victor, "Curb Your Enthusiasm for Pigovian Taxes" (2015). Law Faculty Works. 3. http://digital.sandiego.edu/law_fac_works/3 This Article is brought to you for free and open access by the Law Faculty Scholarship at Digital USD. It has been accepted for inclusion in Law Faculty Works by an authorized administrator of Digital USD. For more information, please contact [email protected]. ESSAYS Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer* Pigovian (or “corrective”) taxes have been proposed or enacted on dozens of harmful products and activities: carbon, gasoline, fat, sugar, guns, cigarettes, alcohol, traffic, zoning, executive pay, and financial transactions, among others. Academics of all political stripes are mystified by the public’s inability to see the merits of using Pigovian taxes more frequently to address serious social harms, some even calling for the creation of a “Pigovian state.” This academic enthusiasm for Pigovian taxes should be tempered. A Pigovian tax is easy to design—as a uniform excise tax—if one assumes that each individual causes the same amount of harm with each incremental increase in activity on the margin. This assumption of uniform marginal social cost pairs well with the limited information and enforcement capacity of government institutions. But when marginal social cost varies significantly, a Pigovian tax may not lead to an optimal allocation of economic resources.
    [Show full text]
  • The Double Dividend Hypothesis of Environmental Taxes: a Survey
    THE DOUBLE DIVIDEND HYPOTHESIS OF ENVIRONMENTAL TAXES: A SURVEY RONNIE SCHÖB CESIFO WORKING PAPER NO. 946 CATEGORY 1: PUBLIC FINANCE MAY 2003 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the CESifo website: www.CESifo.de CESifo Working Paper No. 946 THE DOUBLE DIVIDEND HYPOTHESIS OF ENVIRONMENTAL TAXES: A SURVEY Abstract This survey reviews the recent literature on the double-dividend hypothesis of environmental taxes and discusses some recent extensions of the standard model such as the distributional consequences and the importance of the non-separability assumption between consumption goods and environmental quality for the optimal design of environmental policies. Furthermore, the paper analyses alternative concepts of a double dividend by looking at the employment dividend in countries that suffer from involuntary unemployment, and rent- extracting dividends that resource-consuming countries can reap at the cost of resource- owning countries. JEL Code: H20, Q28. Ronnie Schöb Faculty of Economics and Management Otto-von-Guericke University Magdeburg P.O.Box 4120 39106 Magdeburg Germany [email protected] Helpful comments by Sven Wehke and the participants of the annual meeting of the Umweltökonomischer Ausschuss des Vereins für Socialpolitik at Berlin are gratefully acknowledged. The usual disclaimer applies. 1 1. INTRODUCTION In the early seventies, environmental awareness grew and environmental protection started to climb up the political agenda. Right from the beginning of the greening of politics, the idea of taxing polluting activities dating back to Pigou (1920) has been taken up in the political discussion. It was widely accepted that environmental taxes are an efficient instrument to protect the environment, superior to the classical environmental policy instruments of command and control.
    [Show full text]
  • Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer
    Vanderbilt Law Review Volume 68 | Issue 6 Article 4 11-2015 Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer Follow this and additional works at: https://scholarship.law.vanderbilt.edu/vlr Part of the Tax Law Commons Recommended Citation Victor Fleischer, Curb Your Enthusiasm for Pigovian Taxes, 68 Vanderbilt Law Review 1673 (2019) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol68/iss6/4 This Article is brought to you for free and open access by Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law Review by an authorized editor of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. ESSAYS Curb Your Enthusiasm for Pigovian Taxes Victor Fleischer* Pigovian(or "corrective") taxes have been proposed or enacted on dozens of harmful products and activities:carbon, gasoline, fat, sugar, guns, cigarettes, alcohol, traffic, zoning, executive pay, andfinancial transactions,among others. Academics of all politicalstripes are mystified by the public's inability to see the merits of using Pigovian taxes more frequently to address serious social harms, some even calling for the creation of a "Pigovianstate." This academic enthusiasm for Pigovian taxes should be tempered. A Pigovian tax is easy to design-as a uniform excise tax-if one assumes that each individual causes the same amount of harm with each incremental increase in activity on the margin. This assumption of uniform marginal social cost pairs well with the limited information and enforcement capacity of government institutions. But when marginal social cost varies significantly, a Pigovian tax may not lead to an optimal allocation of economic resources.
    [Show full text]
  • Welfare Economics (Draft, September 22, 2006)
    WELFARE ECONOMICS (DRAFT, SEPTEMBER 22, 2006) W000031 In 1776, the same year as the American Declaration of Independence, Adam Smith published The Wealth of Nations. Smith laid out an argument that is now familiar to all economics students: (1) The principal human motive is self-interest. (2) The invisible hand of competition automatically transforms the self-interest of many into the common good. (3) Therefore, the best government policy for the growth of a nation’s wealth is that policy which governs least. Smith’s arguments were at the time directed against the mercantilists, who promoted active government intervention in the economy, particularly in regard to (ill- conceived) trade policies. Since his time, his arguments have been used and reused by proponents of laissez-faire throughout the 19th and 20th centuries. Arguments of Smith and his opponents are still very much alive today: The pro-Smithians are those who place their faith in the market, who maintain that the provision of goods and services in society ought to be done, by and large, by private buyers and sellers acting in competition with each other. One can see the spirit of Adam Smith in economic policies involving deregulation, tax reduction, denationalizing industries, and reduction in government growth in western countries; and in the deliberate restoration of private markets in China, the former Soviet Union, and other eastern European countries. The anti-Smithians are also still alive and well; mercantilists are now called industrial policy advocates, and there are intellectuals and policy makers who believe that: (1) economic planning is superior to laissez-faire; (2) markets are often monopolized in the absence of government intervention, crippling the invisible hand of competition; (3) even if markets are competitive, the existence of external effects, public goods, information asymmetries and other market failures ensure that laissez-faire will not bring about the common good; (4) and in any case, laissez-faire may produce an intolerable degree of inequality.
    [Show full text]
  • Externalities and Public Goods—In More Detail
    Externalities and CHAPTER NINETEEN Public Goods In Chapter 13 we looked briefly at a few problems that may interfere with the allocational efficiency of perfectly competitive markets. Here we will examine two of those problems—externalities and public goods—in more detail. This examination has two pur- poses. First, we wish to show clearly why the existence of externalities and public goods may distort the allocation of resources. In so doing it will be possible to illustrate some additional features of the type of information provided by competitive prices and some of the circumstances that may diminish the usefulness of that information. Our second rea- son for looking more closely at externalities and public goods is to suggest ways in which the allocational problems they pose might be mitigated. We will see that, at least in some cases, the efficiency of competitive market outcomes may be more robust than might have been anticipated. Defining Externalities Externalities occur because economic actors have effects on third parties that are not reflected in market transactions. Chemical makers spewing toxic fumes on their neigh- bors, jet planes waking up people, and motorists littering the highway are, from an eco- nomic point of view, all engaging in the same sort of activity: they are having a direct effect on the well-being of others that is outside market channels. Such activities might be contrasted to the direct effects of markets. When I choose to purchase a loaf of bread, for example, I (perhaps imperceptibly) increase the price of bread generally, and that may affect the well-being of other bread buyers.
    [Show full text]