CAFE and Gas Taxes, Take 3
John Whitehead at Environmental Economics offers some links to extra information about the size of an efficient gas tax, and scolds me and everyone else who defends CAFE on practical grounds:
“I’ve read several places, not at Vox Baby, the excuse that since gas taxes are politically infeasible and CAFE standards are feasible then we should embrace the standards. Not many economists buy into that argument, I don’t think. Even so, I’m not sure if it is a good idea to try to convince non-economists otherwise.”
He might be right. He’s certainly right if the costs of CAFE exceed the benefits, I’m not sure that this is the case– it’s inefficient, for sure, but that doesn’t mean it’s not cost-effective.
Speaking more broadly, it’s worth emphasizing that while efficiency is an extremely important metric in discerning good policy from bad, it’s not the absolute last word. It’s easy to say that a policy that is not cost-effective should be scrapped (think “ethanol subsidy”), as it is actually harmful– but an inefficient policy can still yield benefits, just not the maximum possible benefits. Why would we choose a policy that provides less than optimal benefits? Because we should not let the perfect become the enemy of the good. As economists, we know that we are always making decisions under constraints– and to ignore the constraints of political feasibility is somewhat foolish. It’s certainly worth educating people and pushing for greater efficiency in public policy, but if given a choice between a cost-effective but inefficient policy that we have right now, or no policy because we’ve managed to scrap the current one but haven’t managed to implement the ideal policy, we should take the former.
As an aside to that aside, it’s also worth noting that when crafting policies, distributional considerations, particularly those of an ethical dimension, need to have a place alongside efficiency. An example of this is the classic pollution case that is usually used to illustrate the Coase Theorem: a factory, as a byproduct of its production, generates pollution that sickens people downwind. By establishing a system of private property rights, we can always reach an efficient outcome (we’ll skip the demonstration). However, we can assign the right to clean air to those downstream, or the right to pollute to the factory. Both outcomes are efficient, but most people find the idea of assigning a right to pollute offensive, if not a facilitator of extortion: what then is to stop someone else from just building a large toxic fire pit that provides no benefits and accepting payments for not laying a match to it?
Bringing things back to the CAFE issue, my position assumes two things: that CAFE is in fact cost-effective, and that a gas tax actually is politically infeasible. The first can be proven or disproven, and the second is open to speculation. If either of these is false, John is certainly correct. As far as equity and other non-economic considerations, I don’t believe that a gas tax would be in any way inferior to CAFE; it would probably satisfy these considerations more optimally. However, I do think it’s a point worth mentioning occasionally, as we economists (yes, I’m inviting myself in) have sometimes been known, rightly or wrongly, for emphasizing efficiency above all else.