Wednesday, December 15, 2010

The Grinch is No Pigovian

Art Carden, an Austrian affiliated with the Mises Institute, recently published a version of The Grinch Who Stole Christmas at Forbes that presents the Grinch as a Pigovian trying to shut Christmas down in Whoville by citing externalities. For example, it starts with:

"Every Who down in Whoville liked Christmas a lot.
But the Grinch, who lived just north of Whoville, DID NOT.
He stood and he hated the Whos and their noise
He hated the shrieks of the Who girls and boys
For fifty-three years he’d put up with it now—
He had to stop Christmas from coming, somehow.
He asked and he questioned the whole thing’s legality
Then his eyes brightened: he screamed “externality!”
He reached for his textbooks; he knew what to do
He’d fight them with ideas from A.C. Pigou
This idea has merit, he thought in the frost
A tax that was equal to external cost
At the margin, would give all the Who girls and boys
An incentive to stop all their screaming and noise
Failing that, an injunction to make them all cease
And they’d have to pay him to have their Roast Beast."

I can't let this one be, because it tarnishes (1.) a Christmas classic, and (2.) an economic classic, and that simply cannot stand.

Carden is certainly right that A.C. Pigou would consider the uncompensated costs that the Grinch bears valid for consideration. Pigou is an all-inclusive sort of guy in that sense. Much like Cindy-Lou-Who, Pigou recognizes the fundamental Whomanity of the Grinch and wouldn't just shut him out in the cold on Christmas. But it simply doesn't follow that Pigovian logic would militate against Whoville Christmas cheer. After all, Pigou says that we need to consider all uncompensated costs and all unpaid for benefits - there can be positive externalities as well as negative externalities. And while Whoville celebrations may be a genuine negative externality for the Grinch, it's a positive externality for all the residents of Whoville. Think of it like the way in which a vaccination is a positive externality. If one person gets a vaccination that's good for them - they enjoy benefit. But if the whole community gets a vaccination they get additional benefit because of the actions of others. Pigovian logic would suggest that Whoville singing could be subsidized, not taxed.

Now, just because there's a logical case that it could be subsidized on the grounds of externality does not mean that it should be subsidized. I'm also a firm believer that the very act of commoditization cheapens some goods, and so its not necessarily appropriate to transact for optimal Whoville celebration levels at all. But if you were to consider it as a transaction, as the Grinch does in Carden's poem, Pigou is unequivocally on the side of Whoville, not the Grinch.


  1. You've only quoted part of the poem, of course.

    Coase would say that if you adequately assign property rights (even arbitrarily), then those activities that generate more utility than cost will tend to happen, and those that generate more cost than utility will not -- assuming zero transaction costs so that transfer payments can effectively arbitrate among property holders.

    Pigou adds that when transaction costs are high, the government can intervene to make those transfer payments happen (via taxation and/or subsidy) that would otherwise not happen because of the high transaction costs.

    My impression is that Carden thoroughly appreciates all of this thinking by Coase and Pigou.

  2. Yes, there is a Coasian conclusion but I don't think that changes the fact that the Pigovian beginning was a little odd.

    I need to read up on these strong versions of Coase. They seem completely implausible to me. The whole reason to start with Pigou, of course, is that property rights are incomplete. As I outlined above, I think Carden provides a very odd picture of how Pigou might apply to this situation.

    But lets take your point on Coase and assume complete property rights. The "arbitrary" point has never made sense to me. Let's say the Grinch has complete property rights to sound-waves through which the Christmas songs travel. He could clearly demand compensation for his costs. But is this optimal? I don't see how, because we still have a situation where benefits from singing can't be enjoyed because of the arrangement of property rights.

    Utility and cost are contracted for if people have property rights on the basis of which they can contract. I can't see how arbitrarily assigning those property rights - even if the rights themselves are completely assigned - guarantees the utility is maximized.

    Anyway - I'm sure that's all unclear. I'll try to circle back to this.

    The point is, Art may apply Coase well enough (if Coase is even right on this point), but he very selectively applies Pigou.


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