Plain Sense Economics

This article in The Wall Street Journal describes the British economist, A. C. Pigou.

Here’s an excerpt:

In the years leading up to his death, in 1959, he was a reclusive figure, rarely venturing from his rooms at King’s College. His novel ideas on taxing polluters and making health insurance compulsory were met with indifference: Keynesianism was all the rage.

We’ve talked about Pigou, and his Pigovian taxes in other posts. As the article reminds us Pigou recognized that sometimes market dynamics fail to address social needs. One set of these market failures (or imperfections as they are also called) is externalities. These occur when players that are not a part of a transaction are affected by the transaction. Neighbors living next to a polluting plant do not participate in the sale of the goods or power produced by the plant, yet they incur a cost. The friends of a child who has been immunized benefit from that child’s vaccination, yet they don’t get involved in the cost-benefit decision made by the child’s parents. Both are cases of externalities. A Pigovian tax can help remedy a negative externality, providing incentive to the polluter to change their behavior.