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Friday, April 13, 2012

Lower Growth Can Be Better Than Higher Growth

Whenever the subject of carbon taxes is raised, the inevitable response from the political right is that such a tax would lower economic growth and employment, and therefore we shouldn't do this (the "it will kill growth and jobs" objection is a standard reply to policies the right doesn't like). Lower growth is, of course, worse than higher growth.

But that's not necessarily true. If firms are allowed to pass some of the costs of production to others in the form of externalities, then it's likely that firms will grow faster than is optimal when all costs are internalized. If we force these firms to internalize the costs of production -- to pay the full costs of production, including in pollution/environmental costs -- then instead of moving away from the optimal growth path to a lower, suboptimal path, we would be moving from higher than optimal growth toward the optimum. More is not better when more depends upon being able to pass environmental costs costs off to others.

    Posted by on Friday, April 13, 2012 at 12:42 AM in Economics, Environment, Market Failure | Permalink  Comments (47)


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