env eco

Green Blog: A “Second Best” Tax

by Elaine Schwartz    •    Aug 7, 2013    •    589 Views

By Amy Tourgee, guest blogger, Kent Place School alumna and Environmental Studies undergraduate at Princeton University

Taxes. It’s a word no American wants to hear.  A word of much debate (2012 presidential election, anyone?).  … What about a carbon tax? Not likely.

But things are different in Ireland, where the government has implemented taxes on the use of fossil fuels in homes, offices, vehicles and farms (read full NYT article here).  In all honesty, the tax was not initiated with the sole intention of helping the environment – tax revenues in Ireland fell 25% after its economy went south in 2008 and the EU actually encourages countries with debt to consider an environmental tax because it raises a lot of revenue.

On the upside though, automobile makers have begun manufacturing high efficient engines that give you the most miles to the gallon.

On the topic of these new fuel efficient cars, though – I wonder… Would people with cars with higher miles/gallon subconsciously drive more than they normally would because in their mind, they’re getting a great deal on gas?  Would the increased price of fossil fuels due to a tax simply become the new normal in the long run? Instead of cutting down on the use of carbon, would people just accept that’s what they have to pay and go back to their original consumption?

Especially with the case of driving, people are so dependent on their cars as transportation, I wonder how much their driving would actually change long-term.  As a Prius owner, I know I’ve definitely thought, “Even if I drive twice the distance to that all you can eat sushi restaurant, it’s still only using the amount of gas of a normal car!”

Economic Lesson

These questions arise when you categorize a carbon tax in welfare economics as a “second best instrument.”  The theory of second best basically says that when you can’t achieve an optimal condition, use a second best approach.  For example, if the government wants to guarantee that people will decrease the use of gas for their cars, they would limit the quantity of gas – that’s it, can’t go over your quota of gas!  By instead changing the price of carbon via a tax, you can financially discourage people from high consumption, but if they really want to pay the money to drive around a lot, you can’t stop them.  Hence carbon tax is second best.

Please note that this entry was first posted on January 9, 2013.

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