The Reason.org blog Out of Control is out of control (how many times do you think bloggers have used that line!). In a post dumping on Mankiw's Pigou Club they bring this:
Pigou has a theory that one can create optimal taxes to resolve externalities. Public choice theory demonstrates that the government's reach for optimality will always exceed its grasp.
In any social science, never say always (or never).
Public choice is rational choice theory applied to the political process. It is used to show that much of what government does leads to some waste. For example, suppose that Congress decides to tighten up fuel economy standards. This will hurt auto makers so much that they'll spend a lot of money to try to tweak fuel economy standards so that they aren't hurt too much (i.e., rent seeking). We might see loopholes and exemptions written into the laws and other things that aren't all that efficient. Can you imagine that?
But, this fact of life doesn't preclude government intervention in a market economy as many economists say. Consider this simple example. Suppose the net benefits from an environmental policy is $1 million. If rent seeking eats up $250k in resources and the policy tweaking eats up another $250k then there is still $500k in positive net benefits left to enjoy. Libertarians always assume that the costs of rent seeking eats up all, and more, of the net benefits of correcting market failures.
My view is that we should pursue government policy to correct market failures as long as the net benefits are positive and the expected costs of rent seeking are less than the positive net benefits. In order to ensure this, we can try to encourage policies that minimize the opportunities for rent seeking. For example, command and control-type policies (e.g., fuel economy) are prone to rent seeking. Economic incentives policies (e.g., gas tax, cap and trade) are less prone.
Note: In a list of government waste arguments against the arguments for gas tax efficiency we get this from Out of Control:
Higher taxes would reduce gasoline use and thus drive down gasoline prices, Mankiw argues. Hmm, ever glanced at the gas price elasticities in this country, Greg? Indeed, government policy makers have a long and storied track record of missing the optimality mark thanks to utter ignorance of relevant elasticities.
I left a comment that says something like this:
Mankiw never argues this. Never. Here we have argued that in the long run the high gas tax price might fall from a short run high but it will never fall back to the previous short run (low gas tax). I've even drawn the picture twice. Confusing the two means that you don't understand the economics very well.
