Does cost-benefit analysis always council against extremism? In a reply to Arnold, Mankiw seems to argue that it does:
I am not a scientist and am therefore agnostic about a lot of issues surrounding global warming. Suppose I assign a probability p that Al Gore is right. The optimal policy from my perspective is not to oppose a carbon tax unless p exceeds some threshold. Instead, the optimal tax is increasing as a function of p and is positive for any p>0. A person who thinks p is small would not want a big carbon tax but should endorse a modest one.
But what if there is a fixed cost of having a carbon tax in the first place? For example, the net expected benefits could be:
-$1,000,000 + $10,000,000*p
The $1,000,000 might be the overhead of the carbon tax collectors, or the costs of every tax-payer who has to fill out a carbon tax form, or what have you. Given this fixed cost, for p<.1, the net expected benefits of a carbon tax are negative. On efficiency grounds, Arnold would be correct to counsel inaction until p exceeds that threshold.
Every micro textbook tells us that when the price of a good gets so low that firms can't recoup their fixed costs, it makes sense to simply close up shop – or not open in the first place. The same goes for government programs.
The post appeared first on Econlib.
"the optimal tax is increasing as a function of p and is positive for any p>0". No. It is simply being assumed that carbon is doing more harm than good. If p is low and there is a higher probability that carbon produces net benefits (more agricultural production, opening up of land previously too cold, fewer deaths due to cold, etc.), then it is false that the optimal tax is positive for any p>0. And that's without taking your fixed costs point into account.
Wouldn't Mankiw's position make basically any government program justifiable, no matter how ridiculous?
"Well, I don't know much about broccoli science so if someone proposes a broccoli tax then I should support at least a modest one."