An unintended consequence of Delhi’s odd/even rule is that I finally have a good excuse to stay in and write a piece this even numbered day – as my odd numbered car rests outside, exposed to the road dust. In fact, as it happens, this piece is about unintended consequences.
In a display of the post hoc ergo propter hoc fallacy, the Delhi CM and commentators in the media called the odd/even rule a success as there apparently was good compliance on Delhi’s roads on the first day itself, even as I was still in bed in the a.m. of the 1st of January. There was – believably – no congestion around that time.
If you instead demand that the success of odd/even be measured by PM2.5 levels measured on Delhi’s streets, there was chatter of lower PM2.5 levels in the afternoon compared to the morning. Never mind the fact that particulate matter settles down in the cold, and the heat from the sun thins out the air as the day progresses. In the following days, particulate pollution levels remained critically high. When it did clear – for a day on Saturday the 9th – it was due to the prevailing wind conditions.
As the theatrics of odd/even play out, we must look at the very heart of the issue: unrepresentative pricing of goods due to the unintended consequences of their use. The prices of goods are determined by supply and demand – what it costs the producer to make that good, and what consumers are willing to pay for these goods. However, what if the use of these goods imposed costs or benefits on third parties which have no say in the transaction between the producer and consumer? These costs or benefits are the ‘unintended consequences’ that are referred to as ‘externalities’.
The textbook example of an externality is a steel factory releasing waste water into a lake while producing much needed steel, killing its fish and thereby impacting the local fishing industry. A more pertinent example in this case is the use of fossil fuels, the burning of which releases pollutants, both chemical compounds as well as a particulate matter. In particular, the price of diesel – and indeed diesel vehicles – may cover the costs of producing it as well as the value consumers are willing to pay to use it, but it does not reflect the health and climate change adaptation costs they impose on the society at large.
While there are other theories and policy options* that deal with externalities, the preferred choice by several economists to overcome this problem of unrepresentative pricing are Pigouvian taxes. These taxes are named after English economist Arthur Cecil Pigou, who proposed taxes on goods to internalise costs imposed on third parties. A tax on carbon emissions is one such Pigouvian tax.
Proponents of free markets need not despair: such taxes tackle market failures, which our economies are replete with at the moment. Pigouvian taxes can be more market friendly than imaginary small government utopias. You don’t have to take my word for it: even the mothership of economic liberalism – The Economist magazine – has long advocated Pigouvian taxes on carbon.
The result of such taxes would be the better organisation of the economy: for instance, people may perhaps locate themselves close to their places of work, solar electricity may become cheaper than coal, diesel gensets may be replaced by cleaner batteries, people may buy fewer SUVs for city use (which are as necessary as the ay in okay), manufacturing linkages would be more rational, those responsible for poor public health will pay for it, and so on.
To its credit, the government has introduced a small ‘Green Tax’ on coal, which it plans to increase over time. However, the tax is too little to account for the damages caused by the industry, as I discussed in a previous piece. While existing taxes on petroleum products also act as de facto carbon taxes, they simply tax the volume consumed and do not incorporate the intensities of emissions.
In the United States, economist Greg Mankiw formed something called the Pigou Club, which includes prominent policymakers and influencers. The informal club doesn’t really meet, but members are on board the idea that externalities must be internalised, that people must pay for the social costs they impose. The club includes Michael Bloomberg, Tyler Cowen, Thomas Friedman, Bill Gates, Al Gore, Paul Krugman, Elon Musk, Jeffery Sachs and Joseph Stiglitz.
India also needs its own Pigou Club. Perhaps Raghuram Rajan, Chanda Kochhar, Kaushik Basu, Azim Premji, Piyush Goyal, Abhijit Banerjee, PB Mehta and others could meet and discuss the applicability of this in India’s context (possibly on Sunday to avoid being hassled by the odd/even rule). In particular, they will need consensus on one of the trickiest (and most criticised) aspect of Pigouvian taxes: the accounting of external costs… and benefits. Externalities can be negative as well as positive, and measuring the extent and incidence of each can prove to be a fool’s errand. For this reason, a simplified tax (or subsidy) to discourage (or encourage) certain activities with obvious and grave externalities could be considered. In other words, target behavioural change rather than a complete accounting of all externalities. In the context of Delhi’s crisis, perhaps a mix of a tax on PM2.5 emissions, along with a subsidy to bury (instead of burn) agricultural waste could be pursued.
Such accounting for externalities may not provide immediate relief, but it will contribute to the rationalisation of the economy that is necessary. In the meanwhile, we can keep experimenting with placebos like the even/odd rule.
*The other popular solution comes from Ronald Coase, whose seminal work was built on a critique of older prescriptions for externalities including that by Pigou. He showed how market economics could tackle externalities, at least in theory, by assigning property rights to parties. However, in practice, ‘cap and trade’ solutions based on Coase’s work are fraught with problems and have also not proven to be universally successful. Very interestingly, even the very creator of the ‘cap and trade’ programme now prefers the Pigouvian solution over the Coasian one.
Siddharth Singh is the Area Convenor of the Centre for Research on Energy Security at The Energy and Resources Institute, Delhi. Views are personal.
He writes about Energy Security & Energy Economics on his blog, The Energy Factor, a part of Business Standard’s platform, Punditry.
He tweets as @siddharth3
Email: s_singh@outlook.com
