There's a niceish article The Great Miscalculator by Arnold Kling, mostly about markets. But I think:When a firm's costs are dominated by overhead, price discrimination becomes an attractive strategy, even a necessity. The airline will try to attract price-sensitive customers with a low price while charging a higher price to those customers who are more committed to flying at a particular time rather than searching for a bargain... This also complicates the problem of treating ordinary market failures. For example, suppose that the government wishes to use a tax on airline fuel as a tool to get passengers to internalize the pollution cost of flying. If the airline allocates this additional cost to price-insensitive passengers and leaves its discounts for price-sensitive passengers in place, then the total air miles flown may remain approximately unchanged in response to the taxis wrong. Because he has done the usual confusion of two different things. The thing that doesn't happen - in this particular scenario - is the that total air miles flown [remains] approximately unchanged. And indeed, many or most people would regard that as a failure of the policy. But that wasn't what he started with: that was use a tax on airline fuel as a tool to get passengers to internalize the pollution cost of flying. That has happened. However - because of the somewhat artificial construction of the example - although the price has been internalised the amount of goods consumed doesn't change, because the customers are assumed to be price-insensitive. But that's kinda OK: the point of the tax is to make people pay the full cost of their choices. If, knowing the full cost, they still choose to buy, then they've chosen rationally.
On a completely different note, he tries to point out that chance - contingency - is important. And it probably is. But he over-eggs it:
The evolution of business practices and industry structure can seem inevitable in hindsight. But this is misleading. The personal-computer industry is famous for the role of start-ups, including Apple, Microsoft, and Dell. But with slightly different business decisions, it could instead have been the province of Xerox and IBM.We don't know if this is true or not. We can certainly see, now, that IBM could have been placed to make decisions that would have squelched Micro$oft. But was it actually placed to make those decisions? Quite probably not, even if you jiggle the starting conditions somewhat. Even with contingency, some structural constraints persist.
Refs
* Book review: the Raven Tower
* Brexit: Governing Ourselves by Pierre Lemieux
With every IBM PS2 one was required to purchase a copy of the Microsoft operating system, even if not wanted.
ReplyDelete> “although the price has been internalised the amount of goods consumed doesn't change, because the customers are assumed to be price-insensitive. But that's kinda OK: the point of the tax is to make people pay the full cost of their choices. If, knowing the full cost, they still choose to buy, then they've chosen rationally.”
ReplyDeleteDo you not see the issue this poses to a “carbon tax only” policy as the means to address climate change?
>"If the airline allocates this additional cost to price-insensitive passengers"
ReplyDeleteDoesn't seem specific about whether prices to these customers are increased or not. If not, the airline suffers by reduced profit. If they are increased and passenger numbers do not fall then why wasn't the airline charging these higher prices before? or even higher? Perhaps the airline only gets away with these higher prices when competing airlines also have to raise their prices / when justified by the tax, but does this really stack up?
Surely the point of the discriminatory price policy is to charge as much as you can get away with. Maybe that increases a little because of the tax meaning the price rise is justified. However if a lot of the customers do not pay more then either the few have to pay a lot more (not likely enough as already paying as much as airline can get away with charging) or the airline fails to charge enough extra to recover the tax.
If airline profits fall, then one way or another investment in airline businesses fall: less reinvested profit or less dividends making investment in that sector less likely. In these cases, does the policy more or less get there indirectly?
If you really think Kling was talking about a psychology experiment in "internalizing pollution costs" I think you might be being a little too literal here.
ReplyDeleteAlso, hypothetical scenarios about the past are hypothetical because they didn't happen. Of course you can't know whether they would have - the point is to examine the reasons they didn't.
> the issue
ReplyDeleteNo. Because the main problem at the moment is people emitting for free. It is possible to construct unrealistic scenarios in which people are charge for emissions but choose not to change, but these are specialised and not large-scale.
> why wasn't the airline charging these higher prices before
Ha ha well spotted. Yes, this is a fatal flaw in his argument, that I'd missed.
A flaw in my counter-argument, BTW, is that if the airline is increasing prices for some customers only then only they are having their choices internalised, in a sense. I can hand-wave my way around that if I have to but there's no great point, since (once again) this isn't terribly realistic.
> a psychology experiment
You've lost me.
> you can't know whether they would have
Of course. But I think you've missed the point. Our author is asserting that things could (definitely) have been very different. But he doesn't know that is true.
Everyone is "having their choices internalised" (it's of course the cost of carbon which is internalised). Even if the company charges you the same amount, a larger share of the price goes to pay for the fuel which is all "internalised" could ever mean in this context. If you don't pay for fuel directly, it's not your choices that the tax is directly aimed at.
ReplyDeleteOne of the main things such a tax would do instead is precisely to lower the relative overhead cost the article talks about. That is, it would be an incentive for companies to reduce the very pricing differences the article is premised upon!
One way or another, such a tax is going to suppress both supply and demand. One possible pathway for change is indeed airline profits (as crandles mentionned). Change doesn't happen overnight. And complicated systems are complicated, which is precisely why we generally trust market mechanisms over political micromanagers.
-small government leftist
> “It is possible to construct unrealistic scenarios in which people are charge for emissions but choose not to change but these are specialised and not large-scale”
ReplyDeleteYou may think that the author’s example was unrealistic but there are plenty of real world examples that are more difficult to hand wave away.
For example, the historical data of gas prices in the US compared against vehicle miles travelled per capita [1]. Even during the 1973 fuel embargo, US vehicle miles travelled did not change much[2]. This is because driving habits are not greatly influenced by fuel costs (low price elasticity). Hughes et al 2008[3] states that due to the low price elasticity of fuel, “technologies and policies for improving vehicle fuel economy may be increasingly important in reducing U.S. gasoline consumption”. In other words, people aren’t going to drive less, so you’re better off looking into making sure what they drive is more efficient (incentives/regulations) or provide cost effective alternatives (invest in public transportation, incentives/subsidies for electric vehicles and charging stations).
Also, guess what has a better correlation (1) home heating fuel consumption and fuel cost or (2) home heating fuel consumption and heating degree days[4]? If home heating fuel costs rise, people won’t heat less, they just have to pay more. My location just enacted a carbon tax and it is estimated to increase home heating costs by ~$88/year. This isn’t going to cause people to replace their natural gas furnaces with electric. This also isn’t going to cause people to bust open their drywall to upgrade their insulation. A combination of a carbon tax and incentives might. Furthermore, improving building codes and standards to require better insulation/more efficient boilers will definitely reduce heating fuel consumption.
Again, this is not to say that a carbon tax is a bad idea. I support a carbon tax. I think it’s an important first step and when combined with other measures (such as codes/standards, regulations, subsidies/incentives, etc) becomes even more impactful.
Rather this is to say that your “carbon tax and pray” plan for addressing climate change is a bad idea and completely ignores the realities of consumer behaviour (and real world examples like BC).
[1] https://www.eia.gov/todayinenergy/detail.php?id=19191
[2] https://fred.stlouisfed.org/graph/?g=lls
[3] https://www.nber.org/papers/w12530.pdf
[4] https://www.eia.gov/todayinenergy/detail.php?id=23232
ReplyDelete"Climate-policy purists are focused on the notion of a carbon tax to discourage greenhouse gas emissions, and they look down on any proposal that doesn’t put such a tax front and center."
Purity vs. Pragmatism
https://www.nytimes.com/2019/04/11/opinion/green-new-deal-medicare-for-all.html
I'm a purist then Phil, because I believe that a price on carbon is an important part of any serious measure to reduce CO2 emissions.
ReplyDeleteHere in Australia or wonderful government has given business money to reduce their emissions. At least one business was given money to replace their existing lighting with LED lights. Now that is the sort of action you have when you really couldn't care less about reducing CO2 emissions.
When will CIP internalise that the greatest success to date in slowing AGW thus far achieved didn't touch CO2. The cut in greenhouse gas forcing from Reagan era climate policy -the Montreal Protocol, so far totals that of over four years' of currrent CO2 emissions.
ReplyDeleteNot to pile on, but I think number two on the list is the US conversion from coal to natural gas. And number three might (not sure) be the last decade of China's frantic buildout of hydro in their own and assorted almost vassal states in SE Asia...
ReplyDeleterconnor, while vehicle miles traveled in the US has risen slightly, VMT per capita has dropped precipitously. VMT per capita peaked in 2007 at slightly above 10K miles per capita and currently sits at about 9.8K p.c. https://streets.mn/2018/09/18/chart-of-the-day-per-capita-vehicle-miles-traveled-2018-update/
ReplyDeleteTom,
ReplyDelete> "VMT per capita has dropped"
...both sources showed VMT/capita (and still show low price elasticity), so I don't know what your point is.
Hi rconnor,
ReplyDeleteWell, the point I want to make (but obviously failed to support in your eyes) is that a carbon tax is a good thing, not a bad. People are driving less, but there are more people, so more miles are being traveled. A carbon tax would almost certainly reduce those miles at the margin. We would have lower emissions of CO2 as a result, a good outcome achieved while still leaving choice and freedom in the hands of the citizenry. Simple choice architecture at its best.
It need not be the only thing we do. It may not be the most important thing we do. Why not try it and see while we're trying to cobble up support for other measures?
Tom,
ReplyDelete> “the point I want to make…is that a carbon tax is a good thing, not a bad.”
Please read my last two lines of my first reply (to WMC). I support a carbon tax. I consider it a necessary first step in addressing climate change. However, I believe it won’t be enough, on its own, to address climate change. Price elasticity, real world examples of the impacts of carbon taxes (which are positive but insufficient) and such.
> “A carbon tax would almost certainly reduce those miles”
Except it doesn’t have a major impact. Read the sources. Price elasticity and such.
> "It need not be the only thing we do."
Indeed. My point is that it cannot be the only thing we do. So do you support other measures such as subsidies, incentive programs, R&D support, regulations, etc? If so, we are in agreement.
J C Brookes,
> “Now [incentivizing lighting efficiency improvements] is the sort of action you have when you really couldn't care less about reducing CO2 emissions.”
Care to explain why that’s a bad thing?
It’s not an either/or thing. You can incentives efficiency improvements while also imposing a tax. In fact, both work better when combined.
(And it’s likely your utility that’s paying them, not the government. They do so, likely, because it costs them less to save a kW than it does to produce it and sometimes they gain on the export market (but I don’t know about the power market in Australia). The utility ultimately avoids costs, the business saves money and the planet saves GHGs (assuming your energy generation is not 100% emission free).)