Economist Paul Krugman recently wrote up a short and provocative essay in the N.Y. Times on “Econ 101 boosterism” or the naive application of textbook economics to real-world moral and legal problems. In his essay, Krugman compares the pros and cons of two opposing approaches to reducing global warming or climate change: (a) a regulatory or command-and-control approach (e.g. banning coal) versus (b) a market approach (e.g. cap and trade). At least one of Krugman’s colleagues (Ashok Rao) was quick to criticize Paul Krugman’s essay, claiming that Krugman ignores the effect prices have on consumers’ consumption patterns. But Ashok Rao (and Tyler Cowen, for that matter) commit a major (and common) economic fallacy: they confuse markets with carbon taxes. In defense of Krugman, he wasn’t writing about a carbon tax at all; he was writing about cap and trade. If we’ve learned anything from the great English economist Ronald Coase, it’s that a Pigovian tax is NOT a market solution; it’s just another form of command and control.
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