THE MYTH OF SOCIAL COST.pdf - Institute of Economic Affairs

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S. N. S. CHEUNG III. A TALE OF FOUR ECONOMISTS [The following 'Tale of Four Economists' is of special interest to students of economics.—ED.] In at least four different ways, gains and costs can be balanced at the margin to yield a maximum social gain of £24 from the use of 4 units of input. In effect, the four ways of approaching the question are equivalent; they merely represent different angles of examining the problem. But since confusion over these viewpoints has led to wide disagreement among economists seeking to develop theories of 'social cost', students of the subject will be interested in examining the four approaches. The four methods, used by four economists including me, are illustrated in Table B, where Column 1 again indicates the level of input. 1. Pigou's Input Tax The first method, employed by Pigou, 1 involves the use of Columns 2 and 7 from Table A. Column 2 represents the marginal return of shoe production that can be captured by the factory owner; Column 7 is the marginal cost to society, including both the marginal input cost and the marginal damage inflicted. These two values are equated (^20=^20) at 4 units of input. If in maximising private gain the factory owner operates at 8 units of input, Pigou's balance shows that the social cost exceeds the private return by £16 at the margin. Efficiency will therefore be improved by restraining the owner's behaviour to reduce his input by such devices as taxation or compulsory compensation to the neighbours. Pigou himself, however, was ambiguous on the specific form and magnitude of taxation or compensation. 2 Pigou's balance seems to indicate that the most obvious form of taxation or 1 It is not clear whether Pigou was using this or any other method, although this seems to fit best with his discussion. Pigou was mainly concerned with divergence at the margin, not with balance at the margin. Furthermore, in his numerous examples marginal consideration is seldom evident. (Economics of Welfare, op. tit., dis. li, 7 and H.) 8 Ibid., p. 168 and ff. [30]
f-p Vi O o pJ s o u (I) Input o i 2 3 4 5 6 7 8 9 IO II Pigou's Balance (2) Value of Marginal Private Product £ O 26 24 22 20 18 16 H 12 IO 8 6 (7) Marginal Social Cost £ 0 14 16 18 20 22 24 26 28 30 32 34 TABLEB A TALE OF FOUR ECONOMISTS Vinefs Balance Goose's Balance (10) Unit Price of Output £ i-oo 1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00 (") Marginal Private Output Cost £ 0 046 050 055 060 067 075 086 1 00 I-20 I 50 2 OO (12) Marginal Social Output Cost £ 0 054 067 082 1 00 1-22 I 50 186 2-33 300 400 567 (4) Marginal Private Gain £ 0 14 12 IO 8 6 4 2 0 —2 -4 -6 (6) Value of Marginal Uncontracted Effects £ 0 — 2 - 4 - 6 - 8 —10 — 12 -14 -16 -18 —20 —22 Cheung's Balance (3) Marginal Private Input Cost £ 0 12 12 12 12 12 12 12 12 12 12 12 (i3) Marginal Social Effects £ 0 24 20 16 12 8 4 0 - 4 - 8 — 12 -16
Page 1: & K The Myth of Social Cost A criti
Page 4 and 5: The Myth of Social Cost A critique
Page 6 and 7: CONTENTS page PREFACE Arthur Seldon
Page 8 and 9: II THE FLAWS IN THE PIGOVIAN ANALYS
Page 10 and 11: take place. This new perspective on
Page 12 and 13: THE AUTHOR STEVEN N. S. CHEUNG was
Page 14 and 15: PROLOGUE I. INTRODUCTION Society mi
Page 16 and 17: PROLOGUE economic activity. 1 Clean
Page 18 and 19: PROLOGUE occupation with imposing d
Page 20 and 21: The Myth of Social Cost STEVEN N. S
Page 22 and 23: S. N. S. CHEUNG the costs of making
Page 24 and 25: S. N. S. CHEUNG cannot produce an i
Page 26 and 27: (I) Input o i 10 O 2 3 4 5 6 7 8 9
Page 28 and 29: S. N. S. CHEUNG place between the f
Page 32 and 33: S. N. S. CHEUNG compulsory compensa
Page 34 and 35: S. N. S. CHEUNG generated by the fo
Page 36 and 37: S. N. S. CHEUNG as hours of piano p
Page 38 and 39: S. N. S. CHEUNG no-one enjoys havin
Page 40 and 41: S. N. S. CHEUNG IV. THE FALLACY IN
Page 42 and 43: S. N. S. CHEUNG roads; but property
Page 44 and 45: S. N. S. CHEUNG appear to most of u
Page 46 and 47: S. N. S. CHEUNG A more general stat
Page 48 and 49: S. N. S. CHEUNG right to exclude da
Page 50 and 51: S. N. S. CHEUNG Granting exclusive
Page 52 and 53: S. N. S. CHEUNG presence of an excl
Page 54 and 55: S. N. S. CHEUNG his control). It is
Page 56 and 57: S. N. S. CHEUNG rent may be raised
Page 58 and 59: S. N. S. CHEUNG (i) The first impli
Page 60 and 61: S. N. S. CHEUNG was found on tenant
Page 62 and 63: S. N. S. CHEUNG one need look no fu
Page 64 and 65: S. N. S. CHEUNG farmer or the beeke
Page 66 and 67: S. N. S. CHEUNG cited by Professor
Page 68 and 69: S. N. S. CHEUNG tion, 1 and a growi
Page 70 and 71: EPILOGUE A central element of the '
Page 72 and 73: EPILOGUE its presentation in the ea
Page 74 and 75: EPILOGUE times over by resource-con
Page 76 and 77: EPILOGUE text will emphasise their
Page 78 and 79: EPILOGUE Pigovian solution for an e
Page 80 and 81:
EPILOGUE controversy both in the UK
Page 82 and 83:
EPILOGUE III. THE 'PROBLEM OF THE C
Page 84 and 85:
EPILOGUE ment of fertile by arid la
Page 86 and 87:
EPILOGUE tribal ownership would be
Page 88 and 89:
EPILOGUE constitute the largest min
Page 90:
EPILOGUE effects may outweigh the b
Page 93 and 94:
The Wealth of Nations and the Envir
Page 95 and 96:
Pricing for Pollution WILFRED BECKE
Page 97:
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