Pigovean paternalism

Frances Woolley reports on problems in her students' understanding of Pigovean taxes. After a set-piece question asking students to calculate equilibrium Pigovean tax in an externality case, students were told to answer this last bit:

Opponents of the tax on potato chips take a careful look at Dr. Economides’ study. It turns out that the only people harmed by potato chip consumption are potato chip eaters themselves, as potato chip consumption is associated with bad skin, weight gain and depression. Does this strengthen or weaken the argument for taxing potato chips?

Frances rightly notes that weakens the case for Pigovean taxation; I'd go farther and say that it darn near obliterates it. If the argument for taxation is consumer irrationality, then, as Seamus has noted before, we've stepped rather outside of the rational choice framework that's necessary for assessing costs and benefits in the first place. What does a demand curve even represent in the case where consumers aren't competent to evaluate net personal benefits? Maybe we can derive it from observing consumer behaviour, but revealed preference goes away and the welfare analysis then has to start from a rather different place. Some of the behaviouralists have started building frameworks for that kind of analysis, with multi-self Pareto criteria, but it's hardly canon.

...it seems that some students really don't believe that people are rational decision-makers, fully taking into account the long-term effects of their consumption choices. Even when people are only harming themselves, they support Pigouvian taxes on paternalistic grounds, to stop people from harming themselves.

It seems to take irrationality of a very particular form for Pigovean taxes to be a solution to internality problems. We need it to be the case that consumers irrationally discount health costs of monetized value x but to respond optimally to taxes of equivalent value. If consumers are also irrationally price-insensitive, you've doubly hurt them by imposing the tax. And we still have the problems that arise once revealed preference can't form a starting point for welfare analysis.

And, despite the explicit framing of the question - that consumers only harm themselves - some students read into it that they were hurting the taxpayer through the public health system:

Some students disputed the basic premise of the question, the idea that potato chip eaters are only harming themselves. Bad skin, weight gain and depression, they argued, are harms to others, because we have a public health system. ...

What interested me about this response was how "health" becomes a lens through which public policy issues are viewed, and a justification of policy choices. Perhaps, though, the students were just mislead by the wording of the question. Guessing that the specific details about bad skin, weight gain and depression must matter in some way, they figured that the question must be asking about health care. 

These are upper level undergrads in economics, and they're messing up the distinction between pecuniary and technological externalities. Costs through the public health system are only a transfer unless these consumers are eating more potato chips than they would in a private system; in that case, only the deadweight costs of the increased portion of consumption get to count as policy-relevant on an efficiency standard.

I hate to keep banging on about this [hit the fiscal externalities tab below]. There's no way that the folks at Carleton wouldn't have hammered home the distinction between technological and pecuniary externalities. But fiscal externalities - externalities that work through the budget constraint but via the tax system - keep seeming technological to students when they're really mostly pecuniary. Partially this is because folks don't start with Buchanan and Stubblebine, but I expect that it has more to do with that fiscal externalities have seemed perhaps an interesting sidebar not worth extensive class time.

We are graduating too many students who know that negative externalities are bad and that government should tax negative externalities, but who have little sense of which ones actually have efficiency consequence.