I appreciate this post from Steve Landsburg on Pigouvian models, Coasian models, and policies addressing external costs (and the comments are valuable too). The foil for his post is an Elizabeth Kolbert New Yorker column, in which she uses two examples to illustrate her argument in favor of a Pigouvian carbon tax — taxpayers foot the bill for the cops’ efforts to fish a drunk guy out of the gutter, and the general public bears the cost of the guy who fills his gas tank to drive his gas guzzler. In both cases, she argues that a tax (on liquor and on gasoline) shifts the burden of the cost in beneficial ways that reduce deadweight loss.
Landsburg’s main point is that we’ve learned more and moved on from Pigou’s original model, notably in the way that Coase characterizes costs from interdependence of individual actions and outcomes as symmetric. Using Pigou’s “polluter pays” logic treats one of the actions as having bad consequences, but as Landsburg notes, “… we now know that Pigou was wrong (although his insights laid the indispensable foundation for later, better insights)”. The most valuable of those later, better insights come from Coase, who builds the reciprocal nature of costs into his model. When individual agents’ actions and outcomes are interdependent, the actions of agent 1 change the outcomes of agent 2 … and vice versa. I also like how Landsburg analogizes Pigou:Coase as Newton:Einstein.
Another notable aspect of this post is the worthwhile link in the comments to a paper from Russ Sobel distinguishing between technological and pecuniary externalities — not all interdependencies lead to situations where there are uncompensated external costs that should be addressed.