For a profession usually caricatured as the “dismal science,” economists are a remarkably optimistic bunch. For several decades now, the profession has striven to prove to non-economists that there are efficient ways to overcome (usually negative) externalities. The two most popular economic prescriptions are permits (i.e., transferable property rights) and charges (i.e., taxes). The optimal permit price or tax equals the difference between private and social cost (or benefit.
What succeeds elegantly in the economics literature and in the classroom does not in practice. The reason turns out to be simple. Governments refuse to abide by the prescriptions of economists.
- Economic incentive schemes are much harder to target efficiently in practice than they are in the classroom; targeting inefficiency creates dead-weight loss.
- When governments establish transferable permit schemes to overcome an externality, they refuse to make these permits fully transferable or otherwise confiscate their value.
- When governments establish charge or tax regimes to overcome an externality, they refuse to set the charge or tax equal to the difference between private and social cost (or benefit).
- Although economists intend for economic incentives to restore optimal prices to the market, governments use them to generate revenue.
This page provides a dynamic catalog of examples, sorted by date.