School kids feel the bite of high food prices - May. 5, 2008

A classic method of teaching the basic economic concept of the production possibilities curve is to illustrate the relationship between a nation’s decision to invest in military goods versus civilian goods. The model typically includes two “products” that a nation can choose to invest in: guns and butter. The goods themselves are not important, rather what they are meant to represent: the tradeoff between defense and civilian focused investment.

Today the United States faces a very real version of the old “guns vs. butter” model. Rising global food prices have put school districts in a bind: how to feed kids nutritious meals as the prices ingredients has risen at unprecedented rates:

Rising food prices are making it harder for schools to cook up ways to give kids the nutrition they need.

Right now, they’re taking shortcuts and shuffling ingredients to make up the difference, but that’s only a short-term solution with long-term consequences on the horizon.

“I’ve been in school service for 27 years and this is the worst it’s ever been,” said Sara Gasiorowski, food service director for Wayne Township Schools in Indianapolis. “I have never seen food prices jump up so far…

“Food prices nationwide have risen 4.5% between March 2007 and March 2008, according to the Bureau of Labor Statistics’ Consumer Price Index, with flour and eggs rising even more dramatically than milk. Grumbles said milk prices in her district are up 22% from last year, which means an increase of 3.5 cents for each of the federally required 16,000 half-pints she provides every day.

“For every penny on a carton of milk, it costs me $30,000 a year,” she said. “That’s $105,000 extra on my food bill.”

Flour prices have roughly doubled over the last year, according to Grumbles, to $19 per 50-pound bag. To make up for the difference, she substitutes canned peaches for fresh apples “to save a couple pennies” per meal, or she uses ground beef in place of chicken.

Unfortunately, federal funding for school lunches has increased at much slower rate than cost to districts of providing those meals:

Federal reimbursement programs cover all or part of school districts’ lunch tabs. Congress lifts reimbursement rates every year, but Gasiorowski said it hasn’t been enough: “We need to be looking at an increase of 12% to 15%, instead of our usual annual increase of 2 or 3%.”

The current federal reimbursement program is based on household incomes; the poorest American students receive $2.47 of federal funding towards their “free lunches”, while students from the highest income bracket only receive $0.23 per meal. The problem is, the average school lunch now costs $3.10, so these days no one is actually receiving a “free lunch”, not even the poorest American students.

This article struck me in that is truly does illustrate the concept of tradeoffs as illustrated in the production possibilities curve. Society must allocate its scarce resources towards the goods and services it deems most desirable based on the needs of its citizenry. Complications arise in this basic model, however, when government is involved.

The commitment to subsidizing school lunches is based on the idea that if the responsibility of feeding American school children were left to the free market, resources would surely be underallocated towards nutritious meals, representing a market failure. School lunches are a merit good, meaning they would be underprovided by the free market.

The same is true of national defense. In fact, some believe that if left completely up to the free market, national defense would not be provided at all, rather individuals who could afford it would hire private security forces to protect their private property. When a good would be totally neglected in a free market, it is called a public good. This is national defense, a good that were it not provided by the government would probably not be produced at all.

Clearly, both “guns” and “butter” create benefits for society. In the case of both national defense and nutritious school lunches, both goods are under-provided by the free market, and therefore should be subsidized or fully provided by the federal government. As this story reveals, however, the US is now in a situation where more resources need to be allocated towards “butter”, perhaps even if this means allocating fewer resources towards “guns”, or any of the other myriad public goods the government provides society with.

Update: I received an email message from a reader about the above blog post:

I have to say that your “guns and butter” diagram is “interesting.” I am not clear on why the United States should spend vastly more on school lunches than on defending the free world While government provided school lunches may have a place, most Americans feed their own children and do not depend on Federal financing.

Where did you get the notion that feeding our children would be “under-provided by the free market”

Here was my reply to this reader. I’m posting it here because I want to make it clear the the diagram above is not meant to make any political statement about US military spending:

Hello,

Actually, the PPC was included simply to illustrate the basic tradeoff that society faces when it chooses how to allocate its scarce resources.

Having taught at least for a short while in public schools, I can say that nutritious lunches are definitely “underprovided” by the free market, that is, many students in poor communities in America depend on the “free and reduced” lunches that are provided through federal and state funding programs… I once volunteer taught in a poor Elementary School in Spokane, Washington where 40% of the students ate only two meals a day, both provided free by the school district: one at 8 in the morning, one at noon. Many of these children had parents who were poor, unemployed, often addicted to drugs, who failed to put any food on the table whatsoever.

In other words, I do think that nutritious meals are a “merit good” which by definition is one that is underprovided by the free market, therefore requires subsidies from the government. Otherwise, why would the government offer such subsidies at all, if these meals were something the free market could adequately provide on its own?

Again, I was not making any political statement with the graph, only pointing out the basic economic concept of tradeoffs and the idea that society must allocate its scarce resources towards an “optimal” combination of goods and services. The article indicates that in this time of rising food prices, not enough of America’s resources are going towards providing nutritious meals for school children, indicating that a movement along the PPC might be in order. The degree of such a move is irrelevant, only the fact that a movement must occur if nutritious meals are to continue to be provided. In fact, the x-axis could have represented any other public good the government provides for society, I chose “military spending” so that the current example was consistent with the classic example of “guns vs. butter”.

Hope that clears things up…

Best,

Jason

How does a growing Chinese middle class threaten duck populations in the American Midwest? Here’s the story:

As Prices Rise, Farmers Spurn Conservation Program - New York Times

“You can’t pay me NOT to farm this land!”

This is the view being expressed by more and more American farmers today. Since 1985 the US government has paid hundreds of thousands of farmers around $50 per acre of land per year to NOT grow food. In other words, if you were a farmer with 1,000 acres, you could earn $50,000 a year for not doing anything with it at all, just letting it sit idle.

What is the logic of such a program? In the mid-80’s food prices were so low that farmers working their tails off to cultivate and harvest their lands often found themselves losing money when they went to sell their crops. The traditional farming lifestyle was in jeopardy as farmers experienced year after year of economic losses. Improvements in farm equipment, along with the widespread use of chemical fertilizers, pesticides and herbicides had increased farm yields to levels never before achievable in human history. What increases productivity for all farmers, however, also increases total supply of crops, driving prices to historic lows. All this meant farmers could barely get by in the American heartland.

Enter the government:

…the Conservation Reserve was conceived as part of the 1985 Farm Bill. Participants bid to put their land in the program during special sign-ups, with the government selecting the acres most at risk environmentally. Average annual payments are $51 an acre. Contracts run for at least a decade and are nearly impossible to break — not that anyone wanted to until recently.

Things were great for the farmers. Output fell as millions of acres went into disuse, while farm incomes rose due to rising prices for their outputs and transfer payments from the American taxpayers. Farmers now had to work less to earn more money.

Today, however, farmers are putting millions of idle acres back into cultivation. They are choosing to work harder and farm more land in order to take advantage of the rising world food prices caused by the increasing demand for meat among the world’s emerging middle class and the rising price of grains due to the push to promote ethanol as a renewable energy.

The farmers’ behavior today is a perfect demonstration of the law of supply, which acknowledges the direct relationship between a product’s price and the quantity that producers will bring to market. There are actually two markets at work here: the market for cropland, and the market for wildlands. Farmers face a tradeoff in their decision of whether to farm their land or let it lay fallow. In 1985, the government made the decision that not enough land was lain fallow, so it subsidized farmers who set lands aside for conservation. Since subsidies are a determinant of supply, the supply of idle land increased while the supply of cultivated land decreased, driving up food prices.

In addition to the law of supply, this article also encompasses the concept of market failure. The Farm Bill of 1985 inadvertently corrected a market failure relating to “merit goods”, or those that create positive externalities or spillover benefits for society. In the case of farmland, the less land was used for farming, the healthier the wildlife populations on the now idle lands of the American Midwest. Hunters, environmentalists, and conservation groups had much to cheer about:

,,,hunters had more land to roam and more wildlife to seek out, with the Agriculture Department estimating that the duck population alone rose by two million; and environmentalists were pleased, too. No one disputes that there are real environmental benefits from the program, especially on land most prone to erosion.

At its peak the “Conservation Reserve”, as it was known, saw more than 36 million acres set aside for wildlife. Today, however, farmers are choosing to put this land back into cultivation.

Markets are complicated things. Markets do a fantastic job of assigning values to easily tradeable commodities like corn, soybeans, sunflower seed oil, and wheat, which happen to be some of the crops most commonly grown on the millions of acres set aside for conservation since 1985. What market fail to do, however, is to assign adequate values to the non-tradeable goods in our society. The biodiversity of a wild grassland, the health of a water fowl population, the carbon-sequestration capacity of a standing forest, and the joy a hunter gets from roaming a fenceless wild land.

As food prices continue to rise in response to the shift towards bio-fuels and the growing demand for meat among developing countries’ consumers, there will be more and more pressure for farmers in the industrialized world to take their lands out of conservation and put them into cultivation. This is not only a rich world phenomenon either. In Brazil, farmers are responding to rising sugar prices by cutting down ever growing chunks of the Amazon, one of the world’s last great rainforests, sometimes called “earth’s lungs” because of its ability to trap carbon from the atmosphere.

If balance between conservation and cultivation is to be achieved, it requires a market system that puts a tangible, tradeable value on the sometimes intangible “goods” relating to the environment. For now, a short-term solution might be a new Farm Bill that offers farmers a more substantial payment for keeping lands idle. Such an interventionist approach may stem the loss of wild lands, but does little to address the bigger problem of market failure underlying the degradation of the world’s remaining natural environments.

Answer: Because sometimes it’s just the right thing to do.

Major British retailer Marks & Spencer will charge for plastic bags - International Herald Tribune

More and more firms and governments are seeing the merits of corrective taxes on plastic bags. British retailer Marks and Spencer will voluntarily begin “taxing” its customers who wish to use plastic bags:

Beginning May 6, food and clothing retailer Marks & Spencer says it will charge 5 pence (10 US cents, €0.07) per plastic bag.

Marks & Spencer says it hopes the charge will save 280 million bags per year, and income from bags that are sold will go to an environmental charity called Groundwork.

The company said Thursday that it has tested the idea in Northern Ireland and southwestern England, and says it cut bag use by 70 percent.

Now that’s good economics, right out of a principles text: tax the product whose overconsumption creates negative externalities for the environment, and use the revenue earned to support environmental projects in the community. Here’s to Marks and Spencer, a corporation with an environmental conscience!

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Motivated by a Tax, Irish Spurn Plastic Bags - New York Times

Here’s a textbook example of how government can use taxes to correct a market failure.

In 2002, Ireland passed a tax on plastic bags; customers who want them must now pay 33 cents per bag at the register. There was an advertising awareness campaign. And then something happened that was bigger than the sum of these parts.

Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.

A market failure existed; too many plastic bags were being used and discarded, creating negative externalities for society. A responsible government minister made it his mission to correct this market failure, and in the face of strong opposition from retailers. But guess what, it worked. Not only have they practically disappeared from the country’s retail stores, but their use has become a social taboo.

Why don’t more developed countries, where citizens can afford to care about the environment, place corrective taxes on plastic bags? Heck, why not use taxes to correct other market failures, too? How about a gas tax, for goodness sake?

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Environmental Economics: From the Answer Desk: Monitoring Cap and Trade

Towards the end of our last Micro unit, which was on Market Failure, SAS AP Econ student asked a good question in a comment on my blog post “Reducing negative externalitites - the European market for carbon emissions”

I forwarded Kevin’s question to the two professors who write the blog Environmental Economics. Their response to Kevin’s question is in the link above. Here’s what was posted on their blog last week:

Reader Jason Welker received the following question from a high school student (Kevin Yeh):

“It’s very interesting how this whole marketing pollution rights works. In this way the “commons” in the tragedy of the commons becomes privatized, and companies are forced to take responsibility for their pollution which is being dumped into the atmosphere.I do have one question, though, and that is how does one regulate the amount of pollution a factory dispenses into the air? How can the government be sure that a firm is not violating the law by dumping more than its licensed amount?”

My question: Why do Jason’s high school students ask better questions than my PhD students?

Anyway, I’m getting ready for a lecture on the EPA’s Acid Rain Program and I happened across this answer…

“Emissions monitoring and reporting systems are critical components of a successful program. Since the Program’s inception in 1995, the emissions data – continuously monitored by sources, verified and recorded by EPA, and posted for public review on the Internet – has been among the most complete and accurate ever collected by EPA. Unlike traditional emissions limitation programs, the Acid Rain Program requires an accounting of each ton of emissions from each regulated unit to determine compliance. The Acid Rain Program requires units to install Continuous Emissions Monitoring Systems (CEMS) to continuously measure and record emissions. In order to ensure accurate emissions monitoring and reporting, regulations specify equipment certification procedures, periodic quality assurance and quality control procedures, record keeping and reporting, and procedures for filling in missing data periods. All affected units are required to report hourly emissions on a quarterly basis to EPA’s tracking system. EPA invests substantial time and resources into assuring that both the monitoring and reporting of emissions are occurring properly and efficiently. Conservative “missing data” procedures help ensure that emissions are never understated. Real-time electronic auditing by EPA helps to ensure that emissions data are accurate, consistent, and complete.”

There you have it, Kevin! Looks like SAS Econ students are asking better, more relevant questions that Economics PhD students! Ahh… you guys make me proud!

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Shanghai American School’s Roots and Shoots club convenes weekly to learn about and brainstorm ways to solve some of our community’s (and indeed, the world’s) environmental issues. In studying the challenges faced by humans in achieving a sustainable, livable, environmentally friendly outcome in our relationship with our cherished home, the planet earth, the question arises: “what is the underlying cause of the ecological disasters of global warming, pollution, deforestation, water shortages, fish stock depletions, species loss, and other environmental issues faced by humanity?”

Economics is the field of study that attempts to address the very problem with which environmental groups like Roots and Shoots are most concerned, the problem of scarcity in a world of infinite wants. Many, if not all, of our planet’s environmental woes are attributable to an economic phenomenon known as market failure. In layman’s terms, a market failure results whenever too much (or in some cases too little) of a good or service is produced and consumed by the economy.

What does this have to do with the environment? The connection lies in the reality that everything we produce and consume (and I mean everything!) originates from the earth. Nothing can be made by the sweat of man alone; in fact, three resources are required to produce any good or service: labor, capital (i.e. tools), and land. Sometimes we think of the resource of land as gifts of nature. However, in a world where environmental threats like those mentioned above are staring us in the face, it is becoming more and more obvious that the natural resources we’ve exploited for so long may not, in fact, have been gifts from Mother Nature at all, and their overuse may impose significant and unaccounted for costs on society AND the environment.

But let’s be honest, consuming is fun! Nothing is more gratifying than scoring a fantastic deal at your favorite boutique, walking out of a fast food joint with a plastic bag full of tasty treats for super cheap, and getting your hands on the latest high tech gizmos as soon as they’re launched (and dumping that old technology out so you’re not the lame one with the three pound cell phone!) However, the true cost of our obsessive consumption habit is not always represented by the price we pay for our fast food, our blue jeans, and our iPod Nanos.

In reality, the prices we pay for our goods and services are far lower than they should be; and the quantity of these things we consume is far higher than it should be. How do we know this? Look around. The very environmental issues with which clubs like Roots and Shoots are most concerned can be traced back to the consumer behavior we enjoy partaking in so much. We’re conditioned to buying what we want, when we want it, and for a price that places little burden on our pocket books.

What we don’t realize, however, is that nature is bearing the burden of our high levels of consumption. In its attempt to absorb the pollutants that are emitted in the manufacture of our products, the waste that’s created from the disposal of our products, and the destruction that’s left behind from the extraction of the natural resources that go into our products, Mother Nature is more than ever choking on the waste created by our economic behavior. The costs born by nature are not accounted for in the production costs faced by firms, nor in the prices paid by consumers. These costs are externalized, or passed on for others to worry about.

The problem is, these days the bill has come due, and the environment is calling in its debts. Humans must now face up to the failures of its markets, and internalize the costs that for so long have been passed on to the environment and society, which suffers from the effects of environmental degradation.

The reality that we’ve used too many natural resources to produce too much stuff for too long is evidenced by simple examination of the natural world around us. Or, in the case of China, the complete lack of a natural world around us. From the pollution filled skies, to the waste clogged waterways, to the traffic jammed highways, China is a case study in market failure. The world, now used to the cheap imports China is so good at pumping out, does not consider the impact that the manufacture and consumption of such a massive variety of cheap products is having on China’s, and these days the world’s, environment.

In the following audio clips, you’ll hear three short stories about how the over-exploitation of resources is causing harm to human welfare and the environment. Each of these stories contains a market failure, usually in the form of a negative externality, or the production and consumption of certain goods creating spillover costs on somebody or something not involved in its production or consumption. See if you can identified who’s being harmed, and who’s at fault:

Story #1: “Where does all that E-waste go?” from Public Radio International’s “The World: Technology” podcast

Story #2: “Trash Island” from WBEZ Chicago’s “This American Life”

Story #3: “Nauru - the island in the middle of nowhere” from WBEZ Chicago’s “This American Life”

 

 E-waste [7:36m]: Play Now | Play in Popup | Download

 

 Trash Island: Play Now | Play in Popup | Download

 

 Nauru: Play Now | Play in Popup | Download

After listening to these stories, reflect for a moment on the true cost of the environmental and human tragedies of which they told. What role does our consumer culture play in these tragedies? What could have been done to prevent the conditions in those E-waste markets in Africa and China, the islands of garbage floating in our deep oceans, and the complete destruction of an island paradise 1,100 miles from the nearest land? Is there anyone to blame? Should we blame our politicians, our leaders? The answer to these questions is: there’s no easy answer, unless we want to get really personal here and point to humans’ own flawed nature: the fact that we are motivated primarily by greed and self-interest.

If that’s true, then perhaps hope for the environment can only be found in the responsible hands of benevolent governments, who once and for all take steps to mitigate the destructive impacts of our endless patterns of production and consumption. In fact, it is often government which is needed to intervene and correct market failures like those in the stories.

Three tools have emerged for governments wishing to correct such negative externalities. These involve three fundamentally different approaches, some more effective than others. One involves direct government control. This is when governments intervene in a market in which negative externalities exist and try to make producers clean up their acts. They threaten producers with penalties and fines, and monitor industries to try and force firms to manufacture their products in a clean, efficient way. (this is like what the Europeans are doing to minimize their e-waste).

The next option also involves a large roll for the government: corrective taxes. Businesses that produce goods that end up polluting the environment (either through their production or consumption) can be taxed based on the amount of pollution they create. If creating more pollution means paying more taxes, the companies will find ways to produce in a more environmentally responsible manner, in order to keep their costs low and to maximize their profits.

The third method for externality reduction is also the most recently adopted. A market for pollution permits is set up, where a government actually gives all the companies in a polluting industry permits that allow them to pollute a certain amount. WHAT? The government’s allowing firms to pollute? Well, yes. The fact is, they’re going to do it anyway, they HAVE to in order to produce anything! The benefit of this system is that the government will only give each firm so many permits, and they’re not allowed to pollute beyond what their permits allow, UNLESS they go and buy more permits from producers that don’t need all theirs. This way, firms have an incentive to pollute less, because any permits they don’t use they can sell to other producers and make profits on those sales! Dirty firms have to buy more and more permits, clean firms get to sell those they don’t need… can you see where this is going? ALL FIRMS want to become clean firms in this scenario!

The three methods introduced above are being used to different degrees by different countries in various industries to try and mitigate the negative effects of some types of pollution and greenhouse gas emissions. Unfortunately, not nearly enough is yet being done, especially by some of the worlds largest economies (and thus, polluters), namely the United States, China, and India.

If our world is to avoid a fate like that of the tiny island of Nauru, where every last resource was exploited to the point where the island could no longer sustain life, then more must be done to reduce the spillover costs that accompany the production and consumption of so many of our precious goods.

I tell my econ students a story about how one day hundreds of years ago some smart guy decided to start calling products (you know, the stuff we consume), GOODS. From that day on humans would always associate consumption with something GOOD. Today, in an era where the goodness of consumption is offset by the evil of environmental destruction, more than a strong government hand is needed. Conservation and appreciation for the gifts of nature, not insofar as they can be exploited by industry, but left intact for the appreciation and welfare of society, both today’s generation and that of our grandchildren, must be fostered and encouraged among global citizens young and old.

Clubs like Shanghai American School’s Roots and Shoots understand the importance of conservation and are working hard to spread environmental awareness. Hopefully, this article and the stories you heard here will help you understand a little more about the economics of the environment, and help you become more educated about what can and should be done to correct the market failures that have led to the dire challenges faced by our world today.

A great website on environmental economics written by two economists WAY smarter than Mr. Welker can be found here: http://www.env-econ.net/

My Way News - Transit Panel Urges Gas Tax Increase

Looks like an increase in the gas tax might be on the horizon… but is it enough? Look at what the proponents of this tax want to do with the revenue:

Under the recommendation, the current tax of 18.4 cents per gallon for unleaded gasoline would be increased annually for five years - by anywhere from 5 cents to 8 cents each year - and then indexed to inflation afterward to help fix the infrastructure, expand public transit and highways as well as broaden railway and rural access, according to persons with direct knowledge of the report…

Okay, so driving places lots of strain on our physical infrastructure (i.e. roads, bridges, highways, etc.), surely we can consider that an externality that could be mitigated through a corrective tax. But does 40 cents over five years sound like enough to correct the negative externalities not identified here? What costs does America’s bad driving habit place on society beyond infrastructure degradation?

Thanks to Professor Haab for the link

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Matt Rothchild of Progressive Magazine concludes that global warming is one “giant market failure”, and argues that US president George W. Bush is making it too hard for regulators in the country that is the world’s largest emitter of greenhouse gases to impose limits on pollution.

Among the externalities caused by the emission of greenhouse gases that Rothchild points out:

• Rising sea levels
• Arctic free of ice
• Draughts  in Africa

 

 "Global warming is a giant market failure" [1:28m]: Play Now | Play in Popup | Download

Discussion questions:

1. Is Rothchild’s understanding of global warming as a market failure correct in an economic sense?
2. Is imposing new “limits on pollution” the best way achieve a long-term reduction in the emission of greenhouse gases?
3. What alternatives to direct government controls over firms’ emissions does the Bush administration have that may make use of “markets” to correct this “giant market failure”?

Michael Munger, Bosses Don’t Wear Bunny Slippers, If Markets Are So Great, Why Are There Firms: Library of Economics and Liberty

The other day when we introduced our unit on market failure, we began by revisiting the concept of free markets as mechanisms for allocating scarce resources efficiently. As I was reading blogs tonight, I stumbled upon this blog post by Michael Munger, professor of political economy at Duke University, where he shares an anecdote he uses when introducing the allocating power of markets through the price mechanism:

When I teach political economy, I start with the neoclassical theory of consumption, and then cover production. And I show students how miraculous is it that the actions of millions of people who have never met can be directed by prices. Resources move toward their highest valued use, and consumption goods are delivered to the consumers who want them.

For example, the United States promoted ethanol as an auto fuel. This sharply increased the price of corn worldwide. As Brazilian reporter Kieran Gartlan put it: “Higher prices are leading Brazilian farmers to plant more second crop corn this year, and the country’s modest corn exports are expected to expand [from 42 million tonnes to 48 million tonnes, an increase of 230 million bushels.]” (DTN, March 2, 2007, emphasis mine).

No one directed the Brazilian farmers to shift to corn production. The article puts it perfectly: “Higher prices are leading farmers….” The leadership comes from the prices themselves! The farmers may have had no idea why the price of corn had increased, to $4.00 per bushel. (After all, Brazil uses sugar, not corn, to produce its ethanol.) But Brazilian corn production increased within a year, by nearly 15%. No one made the farmers switch; they made choices. Other corn producers, in Argentina, Mexico, and several African countries, followed suit. No one talked about it, no one gave any orders; prices led them.

The reason I post this excerpt from professor Munger’s blog now is that it serves as a great response to a student who on the first day of our market failure class posited that perhaps the government could do a better job of deciding what goods and services and how much of them should be produced in an economy.

Yes, markets fail, and for many reasons: a concentration of power among a few large firms, an underallocation of resources towards goods that have spillover benefits, the over-provision of goods that have spillover costs, the failure of the market to provide public goods: these are examples of how market fail.

But when markets work, they really work! The efficiency of resource allocation that results from free, competitive, markets is unrivaled by any central planning agency. Munger’s example above is a simple illustration of this allocative power of markets and prices.

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Greg Mankiw’s Blog: The Pigou Club Manifesto

Here’s a good question to bring up around the dinner table with mom and dad tonight: “When is more taxes good?” Most individuals in society despise taxes; what is it the cynics say? “The only things guaranteed in life are death and taxes.” Clearly, the thought of giving money to the government is as miserable for some as the thought of dying!

But when might more taxes be good taxes? The answer, as you may have guessed, has to do with the concept of negative externalities and the idea that a tax may be used to correct a market failure of too many resources being allocated towards a particular product. One such product towards which too many resources have been allocated in the last several decades is gasoline; that’s right petroleum gas, the life blood of our beloved automobiles, the symbols of our very freedom and prosperity we cherish so much. How do we know too many resources have gone towards the production of gasoline? Simple, there’s too much of it and it’s too cheap. Evidence? Just look around:

• Congested roads
• Urban smog
• Auto accident fatalities
• Shortage of parking spaces in most cities
• Noise pollution
• Sprawling road systems that ugly the landscape
• Global warming

All of the above ills in some way are the result of cheap gasoline. The market failure here is simple: too much gas has been produced and it sells for too cheaply, hence, lots of people drive lots of huge, gas-guzzling SUVs, trucks, vans, sports cars, luxury sedans, Hummers, and not enough small, economical, fuel-efficient automobiles that would put way less a strain on our urban and natural environments.

So what do we do now to fix this problem? Should be dismantle all the oil refineries, shut down the gas stations, and blow up the pipelines that facilitate the production of gasoline? Well, that would be one option, although it’s not ideal. Another might be to require that all auto makers achieve a certain level of fuel-efficiency among their automobiles. That’s what the US government has done by adopting the “Corporate Average Fuel Economy” (CAFE) standards. This sort of direct control creates market distortions of its own, however. One economist has said, “the CAFE standard was a failure and said it was like trying to fight obesity by requiring tailors to make only small-sized clothes”

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