Huang Youguang: talking about the mistake of a Nobel Prize winner from reducing the energy cost of enterprises

 Huang Youguang: talking about the mistake of a Nobel Prize winner from reducing the energy cost of enterprises

Since Chinas reform and opening up, the rapid economic development is obvious to all. Although there are some negative effects of environmental damage, we are also happy to see the reduction of haze days in the past two or three years. Therefore, the author was surprised to hear the following report on the 24th and confirmed on the Internet: the relevant departments introduced the two reductions and one reduction policy to reduce the energy consumption cost of enterprises, in which the total power consumption cost of enterprises has been reduced by 59 billion yuan (RMB, the same below), and the oil price has been reduced for two consecutive times.

Electricity, gas, oil and other energy resources rely on exhaustible resources, and their production and consumption have a great environmental damage. From the perspective of the whole society, we should increase taxes on them, raise their prices, make people (including enterprises) use their costs higher, so as to encourage people to reduce their use, so as to reduce the degree of environmental damage and increase peoples happiness.

On the other hand, is it affected by some extreme right-wing arguments against levying taxes on pollution if there is not enough tax on environmental damage?

In July 1990, before Professor Ronald Coase won the Nobel Prize, the famous domestic Professor Zhang Wuchang wrote the article Coase I know and reprinted it at the end of 2013, when Professor Zhang hosted the Shenzhen Conference on recollection of Coase, he published the manual recollection of Coase (hereinafter referred to as the manual). On the fourth page of this article, Professor Zhang described a most famous debate party in the history of economics in the spring of 1960, including several later Nobel Prize winners and other very famous economists:

Coase asked: if a factory pollutes its neighbors due to production, should the government restrict the factory to reduce pollution by tax or other means? All of you here agree that the government should intervene - just like the environmental protection speech in Hong Kong today. But Coase said, wrong! The argument that followed lasted for three hours turned out to be that Kos could not stand (from page 27 of the manual). Coase won the battle against government interference in pollution (quoted from page 28 of the Handbook). Professor Zhang Wuchangs account of the above-mentioned debate is also confirmed by the recollection of George Stigler (1985), the Nobel Prize winner. There is no problem in reliability at all.

Coases view was published in the Journal of Law & Economics in 1960. This article (Coase 1960) has been the most cited economic article for many years, and is also one of Coases two most important articles. It is worth half a Nobel Prize. Although this paper also discusses some correct and important points, including the two sides of pollution and Coases theorem, the main point of this paper is to criticize Pigou A.C. Pigous proposal on pollution taxation, which is the content of the above three-hour debate.

Coase does not use mathematics or graphic analysis, but only compares the two extreme cases of complete free pollution (all in existence) and complete prohibition of pollution (all in nothing). Given that only these two extremes are taken into account, Coase argues persuasively with reasonable figures that complete free pollution may be better than complete prohibition of pollution, or vice versa, it cannot be generalized, but it depends on the specific situation. Coases conclusion, used to criticize the extreme environmentalists who demand a complete ban on pollution, is tenable. However, Coase uses it to criticize the Pigou tax on pollution, which is wrong, because his conclusion is based on the comparison of all or nothing, ignoring the middle situation. However, it is surprising that the other 20 economists present, including several later Nobel Prize winners, all supported Coase after the debate, from 20 to 1 against Coase to 21 to 0.

Pigou and the vast majority of economists, including me, do not recommend banning pollution completely, because this may make production almost completely stop, and may not pay off (therefore, we should ensure the supply of energy and other important products); but according to the degree of harm of unit pollution to society, we should levy pollution tax, or Pigou tax, on pollution (therefore, we should not reduce the energy consumption of enterprises Cost). This pollution tax will not reduce pollution to the extreme of zero, but to the social best point of which the marginal benefits to polluters and the marginal costs to society are equal. When the harm degree of pollution to society is difficult to estimate, the tax rate of pollution tax can be determined by the marginal cost of reducing pollution through clean-up or abatement investment. Moreover, according to such a tax rate, the income of pollution tax will be greater than the total amount of optimal clean-up investment, so that the source of clean-up capital is not a problem (see my book ng 2004 for details).

Because Coase only compares the two extremes of all and nothing, he ignores an important asymmetry. In the case of free pollution, for the polluter, the marginal benefit of the last unit is infinitesimal, but its harm to the society is great. This asymmetry makes Pigou tax, which can reduce pollution, advantageous. If we only compare completely free pollution with completely forbidden pollution, the benefits and harms of pollution may be roughly symmetrical. Because Coase only makes this all or nothing comparison, he and his supporters ignore the above asymmetry and come to the wrong conclusion against the pollution tax (ng2007, or Huang Youguang 2011).

Coases mistake, on the one hand, is a problem of methodology. On the other hand, the Chicago School overemphasized the function of market and opposed government intervention. Its right to let the market work where the market can operate effectively. However, the problem of pollution or environmental protection cannot be dealt with effectively only by the market itself. It must be carried out with the assistance of the government or even with the cooperation of all countries in the world.

The 1960 debate involved many later Nobel Prize winners. Why were they misled by an obviously wrong comparison? In my opinion, on the one hand, it is the influence of their right-wing ideas of over supporting the market and opposing government intervention. From their mistakes, we can learn from them and be careful of the misleading of ideology.

Coase and Zhang Wuchangs erroneous views against the taxation of pollution have had a great influence in China until recent years, and their supporters include the famous professor Zhang Weiying of Peking University (see details: Huang Youguang 2015). In the past, the author proposed a pollution and congestion tax on cars and gasoline in China, which was criticized as neglecting Coases criticism on Pigou. Therefore, it is very important to understand this all or nothing mistake.

Zhang Weiying published the article the fallacy of market failure theory (hereinafter referred to as Zhang Wen) in Hong Kongs letter Financial monthly on December 2014. This paper attempts to prove: the theory of market failure in traditional economics is wrong. First, externality [such as pollution] is not a legitimate reason for the government to intervene in the market. Without externality, there will be no society. .

The traditional tax theory of pollution is based on the concept of external effect. Pollution is a negative effect and an external cost, because the polluter does not bear this cost. Zhang Weiying believes that it is totally wrong to prove the rationality of government intervention in the market or the failure of the market by using the externality theory (Zhang Wen, P. 122). The reason is: Zhang Weiying asks, if I open a restaurant, I do better than my competitors, and I crush him, is this externality? This is also externality. Should I compensate him? Economists dont think theyre going to pay him. So why should compensation be made in the former case and not in the latter? There is no way for externality theory to answer this question. (Zhang Wen, P. 121). Lets answer this question.

Obviously, Zhang Weiyings problem is to confuse money with real external effects. The former is caused by the impact on the market price; the latter is directly affected. This is a simple distinction of textbooks, for example: the concept of externality here is only limited to the external effect of real, and does not include the pecuniary external effect of money that works through price changes. For example, if some people substantially increase the demand for a certain product, it will drive the price of the product up, thus damaging other consumers. But at least in a fully competitive economy without distortion, the reduction of consumer surplus can be completely offset by the corresponding increase of producer surplus, so this money external effect does not reduce efficiency (Huang Youguang 2005, Section 7.1 end). For example, Zhang Weiyings restaurant has caused losses to its competitors, but brought benefits to consumers. It can be argued that, regardless of other distortions, or the expected effects of other distortions, roughly offset each other [I say the third best case], and the benefits outweigh the losses. As a result, Zhangs restaurant is not required to compensate its competitors.

On the contrary, in the case of substantial external effects, such as air pollution from factories or automobiles, there will be a serious loss of efficiency. For simplicity, regardless of conscience effect or environmental awareness, it is assumed that each actor maximizes his or her net benefits. Therefore, the final unit of pollution, the net benefit of the polluter is close to zero, but it does great harm to the people who are harmed by pollution, so it is inefficient. Therefore, it is of net interest to tax pollution and encourage polluters to reduce pollution in an appropriate amount. This is the essence of Pigou tax. However, a complete ban on pollution, as some extreme environmentalists demand, would be overkill.

The above distinction between money and real external effects is very important, because generally (ignoring the suboptimal problems caused by other distortions) the external effects of money do not cause efficiency loss, while the real external effects such as pollution may have significant loss, or even affect the survival possibility of the world, which must be handled!

Huang Youguang (2005), well being economics, Dongbei University of Finance and Economics Press, translated by Zhang Qingjin

Huang Youguang (2015). The fallacy of environmental protection theory? To discuss with Zhang Weiying, Hong Kong letters financial monthly, February 2015, 455, 131-133.

Zhang Weiying (2014). The fallacy of market failure theory, Hong Kong letters financial monthly, December 2014.

Zhang Wuchang (2013). Recollection of Coase, Department of economics and finance, University of Hong Kong.





About Huang Youguang:

Professor emeritus of Monash University, distinguished professor of Fudan University School of economics, academician of Australian Academy of Social Sciences, and advisory member of global priorities Institute of Oxford University.

Born in Malaysia in 1942. In 1966, he received a bachelors degree in economics from Nanyang Technological University of Singapore and a doctors degree in economics from the University of Sydney in 1971. He was an associate professor at Monash University in Australia from 1974 to 1985, a personal chair from 1985 to 2012, and emeritus professor after 2013. He was elected as an academician of the Australian Academy of Social Sciences in 1980. In 1986, he was elected as one of the ten Australian scholars and ten Chinese scholars in the world whos whoin Economics: abiographic Dictionary of major economics 1700-1986. In 2007, he won the highest honor of the Australian economic society Distinguished Fellow. Invited to work at Oxford University for the first Atkinson Memorial structure in 2018.

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