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June 19, 2014

Moving from Pigou to Government Control


In 1920, economist Arthur C. Pigou explained the problem with what economists refer to as positive or negative “externalities.”  For example, if a manufacturer pollutes the community and doesn’t bear the cost of clean up, there may be little incentive to stop polluting. That’s a negative externality. By contrast, a company that built a beautiful green space as part of its campus that everyone in the community enjoyed would be a positive externality. As Pigou pointed out, the market is likely to oversupply negative externalities because no one bears the financial costs and undersupply positive externalities because there is little financial reason to provide them.   

Pro-taxers seized the opening, introducing Pigouvian taxes, which are imposed on market activity that creates some amount of negative externality, even while typically ignoring the alternative of providing subsidies for positive externalities. 

Enter:  The cow. 

Boisterous these days are those who argue that meat should be heavily and discriminatorily taxed because cows are, well, gassy—greenhouse gassy apparently, emitting methane gas from both ends. 

But even the most ardent advocates have a hard time with the inherent problems with Pigouvian taxes. A study in the journal Nature Climate Change stated, “Implementing a tax or emission-trading scheme on livestock’s greenhouse gas emissions could be an economically sound policy that would modify consumer prices and affect consumption patterns.”  But, the study also noted, “Influencing human behavior is one of the most challenging aspects of any large-scale policy, and it is unlikely that a large-scale dietary change will happen voluntarily without incentives.” 

Pigouvian taxes suffer several other problems.

  • As the study notes, changing behavior is hard, so whether a meat tax would have much, if any, effect is completely unknown and difficult to measure, particularly since beef consumption is already dropping.
  • Trying to balance the cost with some perceived social benefit is, at best, a tricky proposition likely to be caught up in mixed agendas and naked politics, such as a vegetarian agenda or simply another means of government taking taxpayers’ hard-earned income.
  • Such use of the tax code is just one more expansion of government power into control of citizens’ lives.
  • The function of a tax should be to raise money to pay for government, nothing more. Polluting its purpose is what leads to people rejecting taxes as they appear only as tools to oppress.
  • If the goal is to limit or prohibit a behavior, then legislators must have the courage of their convictions and make such behaviors illegal rather than play games with the tax code.
  • The income stream, for which government is always hungry, is at best uncertain. Yet that anticipated income readily becomes the basis for wildly expanded budgets, and later pleas for more taxes. 

There is little, if any, room in the tax code for taxes conceived as a means to influence behavior. However, a conversation about using the tax code as means to control citizens does seem to correctly involve cow waste.


  • TaxBytes-New

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