I think an excellent Pigouvian tax would be a tax on emails. Many emails involve a negative externality (I don’t really want to receive them) and almost all the ones I really want to get are worth much more than a penny or so to the sender. So a penny tax (say) on email would probably generate large amounts of revenue, mitigate an important negative externality, and have minimal inefficient disincentives. Since email servers are necessarily centralized and networked and all email senders are ipso facto connected to an ISP who is charging them for access the transactions costs and evasion problems seem low.

As a reminder, a Pigovian tax is one that is levied to change market behavior – typically to address a market failure like externalities or to prevent over consumption of a common good.  Mankiw extends the idea, hoping that the recipient could set the price. If someone wanted to seriously reduce the email they received – limiting to only those messages from people who really care – then they could set a high price for allowing a message to appear in their inbox.

Interesting idea. It’ll never happen, but it is interesting nonetheless.

Farmers like Mr Errotabere have begun to use water more efficiently, dripping it through perforated hoses rather than flooding fields. There is a growing market in water trades between farmers. Most important, the state has set up a water bank. Farmers north of the Sacramento delta, many of whom grow rice, can offer to keep fallow their least productive lands and sell water to cities and needy farmers farther south.

As the excerpt notes, increasingly scarce water in California’s Central Valley is beginning to be reallocated using some market mechanisms. It isn’t a true market yet – the prices for selling and buying irrigation water is set by a state board. There is a glimmer of hope, though, that consumers of water will start paying something close to water’s value, rather than the historically subsidized fee.As the article points out, Federal and state efforts in the 1930s brought water to a fertile but arid part of California. Water has remained cheap to farmers, and so there was no incentive to use it sparingly. When we drive from Ashland down to the SF Bay Area we pass huge rice fields submerged in water, with what must be huge evaporation loss.

This story in progress points out how, when you want to ration a scarce resource, the best solution is to let the price of that resource reach a level on its own that clears the market, but leaves no surplus or shortage. Not only do we reach an economically efficient solution, but the consumers have an incentive to use the resource wisely.

Meantime, economics offers a better way to manage scarcity: Use prices to ration capacity at peak times. Airlines would have to reflect the higher cost of the desired landing slots in their ticket prices, which would cause some passengers to shift their demand to less congested times. A Reason Foundation simulation with airline decision-makers confirmed that a fee increase for times of peak demand would lead airlines to reschedule as much as 15% of rush hour flights.

Just as deregulation created opportunities for bargain hunters to get more from the airlines, so runway-pricing would reward some passengers for flying at off-peak. The price mechanism allocates supply in all kinds of crazy markets. Why not at airports?

In this blog – he writes about how a gasoline tax, imposed just after 9/11, would have changed many things for the better.

It is a good read.