Pigovian Tax and Subsidies. One of the tools of economic control of governments. Good or bad?

in LeoFinance3 months ago

Currently most of the world's governments use economic mechanisms to keep the economy and society in general under control, learn more about one of them in a simple way and analyze its possible consequences.



Hello leofinance friends, I hope you are very well, today I want to share with you a little bit of economic theory, explained in a simple way in order to understand what is the logic or at least, the stated reason for the actions of many governments in terms of fiscal policy. So let's begin.

The Pigovian Taxes.

They are named after Arthur Cecil Pigou [1877/1959] economist best known for developing the concept of economic externalities, and are a tax that in theory applies to those goods or services that generate negative externalities without including this in the cost of those goods or services. In Christian, a tax on those goods or services that do harm or cause an additional cost to society without this being factored into the price of the good or service.

A series of simple examples of such taxes would be those applied to cigarettes, alcohol and junk food, since these generate health problems in society that have a cost for both individuals and the state that are not assumed by the tobacco or liquor companies. Others would be taxes on those industries that destroy the environment.

Pigovian subsidies.

They are the twin brother of the Pigovian tax, are basically subsidies that are given to those businesses that although they do not have an optimal profitability, generate a benefit to society in general, such as the sale of solar panels to generate clean energy or vaccines against contagious diseases.

But seeing how the world economy is doing lately, it is easy to understand why more and more people are disappointed with government intervention in the economy, and the Pigovian system of regulation, although it proposes a pretty solid logic for its existence, still has some holes in it.

The Good of the Pigovian system.

To begin with, the first positive effect attributed to Pigovian taxes is to discourage entrepreneurs from investing in businesses that may have a negative impact on society.

The money collected from Pigovian taxes is supposed to go to social programs to help counteract the evils caused by things like alcohol or tobacco. Thus creating a social order in which people are free to consume harmful substances if they wish, but preserving the health of those people who do not partake in such practices, or even those same people who do. On paper, a free and fair society.

And finally, they generate a greater flow of tax money, something always useful for a country.

The good thing about Pigovian subsidies.

The logic of the vast majority of entrepreneurs is usually to maximize profits, therefore, research and development of more environmentally responsible technologies, or products with less harmful side effects to health is usually in secondary plane, if it ever enters into consideration, this generates a technological stagnation and a vicious cycle self-destructive for society. Thus the figure of the Pigovian subsidy becomes necessary.

They also help to preserve the food security of nations with agricultural subsidies.

And they help to improve education, a vital instrument for progress and good living.

The bad thing about Pigovian taxes.

A Pigovian tax can lead a company to simply charge the cost to the final consumer and use other methods to ensure its permanence in the market despite the additional costs, these methods can be as low as promoting addictions to their products as happens with soft drinks or some forms of entertainment. And the emergence of lobbies that interfere in the politics of countries to ensure that these companies continue to make profits despite taxes.

The latter generates another problem, when a government ends up becoming dependent on Pigovian tax money it can end up bowing to the demands of these companies, making a mechanism that was initially intended to benefit society, a symbiotic relationship that only serves the companies and the government.

There is also a fundamental flaw in the logic of the whole Pigovian tax system, and that is that it is the governments who decide it, apply it and administer the tax money.

Do governments know what is the least harmful way for society to produce a good or service 9 and if so, can governments be trusted to decide what is the best way to use the tax money 9 and what about corruption and its misappropriation of tax money, can the government be trusted with the money?

These are all very valid questions. And that many experts have tried to answer, among them the Nobel Prize winner in economics Ronald Coase and the father of the Austrian economic school Lunwig Von Mises. Who came to the conclusion that for these reasons, the Pigovian tax is a worse problem than it purports to solve.

The bad thing about Pigovian Subsidies.

The idea that governments do not always know best permeates these as well, as they can lead society to finance inefficient economic models with their tax contributions. For example, the abandonment of Atomic energy in favor of the pursuit of other forms of cleaner energy generation that could take decades to deliver the desired results, when atomic energy could have solved the problem a couple of decades ago.

There is also pressure from economic power groups that ensure the presence of politicians favorable to their interests to ensure the millions of dollars of subsidies, such as pharmaceuticals during the Covid pandemic.


As you can see, the matter is a chimera, on the one hand the existence of a state, and an organized society makes necessary the existence of a Pigovian system of economic regulation, however, it is that same state, and economic power groups are formed in that society which also corrupt the Pigovian system leaving in question the viability of its existence. But tell me, what do you think, is it time to put an end to state intervention in the economy? or is it necessary a better regulation, and cleaner, on those companies that cause damage to society for which they are not paying. I read them in the comments. And I will respond to as many as I can. Thanks for reading me and happy evening.

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