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Chapter 5: Problem 6

A column in the New York Times has the headline "Should We Tax People for Being Annoying?" a. Do annoying people cause a negative externality? Should they be taxed? Do crying babies on a bus or plane cause a negative externality? Should the babies (or their parents) be taxed? b. Do people who plant flowers and otherwise have beautiful gardens visible from the street cause a positive externality? Should these people receive a government subsidy? c. Should every negative externality be taxed? Should every positive externality be subsidized? How might the government decide whether using Pigovian taxes and subsidies is appropriate?

Short Answer

Expert verified
While in theory, annoying people and crying babies cause negative externalities and could be taxed, and people who beautify their gardens create positive externalities and could be subsidised, in practice it would be difficult to implement and regulate such a system. Not every negative or positive externality can or should be taxed or subsidised. Decisions about Pigovian taxes and subsidies require thoughtful analysis and must take into account the magnitude of the externality, the number of people impacted, and the feasibility of enforcing the tax or subsidy.

Step by step solution

01

Identify Externalities

Annoying people or crying babies can be seen as producing a 'negative externality' - that is, their behaviour can lead to discomfort or nuisance to those around them. Conversely, beautifully maintained gardens are producing a 'positive externality' - they offer aesthetic pleasure to passersby without charging them for it.
02

Discuss Taxation and Subsidies

Next, consider whether these externalities should be taxed or subsidised. In theory, as per Pigovian economics, if someone creates a negative externality, they should be taxed to compensate for the social cost and to discourage such behaviour. Likewise, regarding the positive externality, such people could be subsidised to encourage the continuation or increase of such beneficial actions.
03

Consider Practical Application

However, practical application of this theory poses many challenges. For instance, how would one measure 'annoyance', and hence quantify a tax? Similarly, what are the criteria for a 'beautiful garden', and thus qualify for a subsidy? It's subjective and could pretty complex.
04

Generalization of Pigovian System

Ultimately, the question of whether all negative and positive externalities should be taxed or subsidised is not clear-cut. It's not feasible or even desirable to tax or subsidise every small externality. The government would typically consider the magnitude of the externality, the number of people affected, and the ease with which the tax or subsidy could be implemented and regulated.

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