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Most economists do not accept that direct government subsidy to businesses leads to an economically efficient outcome, even in cases of negative externalities.

Most economists do not accept that direct government subsidy to businesses leads to an economically efficient outcome, even in cases of negative externalities. Many economists would say that Pigovian taxes or creation of markets in the externality are likely to be more efficient. Bottom line: market failure does not mean that government solutions are automatically better. Government failure exists too!

rayiner 14y ago
I think in the political discourse, pigovian taxes would be considered "government picking winners and losers" (specifically losers). Also, the question isn't whether direct subsidies are more efficient than taxing externalities. The question is whether direct subsidies are more efficient than doing nothing (which is the only politically feasible alternative).
- trhtrsh 14y ago
  How would "pigovian taxes would be considered "government picking winners and losers" (specifically losers)." I mean, it would be, only in the sense that "criminal justice system picks losers, by arresting people who commit crimes".
- othermaciej 14y ago
  1) I read a lot of economics blogs and I see many economists who are against "government picking winners and losers" in the form of subsidies; but favor, e.g. revenue-neutral carbon taxes. There are strong economic reasons why the two are not at all the same. 2) Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases. Subsidy decisions are not guided at all by the info encoded in the price system, and are instead likely to be based on rent-seeking by favored interests groups. See <http://en.wikipedia.org/wiki/Economic_calculation_problem&#62 http://en.wikipedia.org/wiki/Economic_calculation_problem&#6...; Your original comment cited "basic economics" and implied that the government would be better than the market at "picking winners and losers" in the face of negative externalities. But that is not a consensus view among economists.
  - rayiner 14y ago
    > Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases. In cases, yes. Given the sheer magnitude of thee externalities in environmental situations, not likely. We're talking trillions of dollars of implicit subsidies here.
    - othermaciej 14y ago
      I believe you are committing the "Yes Minister" fallacy: "Politician's logic: We must do something. This is something. Therefore we must do it." Direct government subsidies create deadweight loss, and by hurting the competitive position of companies and technologies that don't get the subsidy, they can actually make the negative externality worse. You can't justify a bad intervention just by pointing to the magnitude of the externality.

rayiner 14y ago

I think in the political discourse, pigovian taxes would be considered "government picking winners and losers" (specifically losers). Also, the question isn't whether direct subsidies are more efficient than taxing externalities. The question is whether direct subsidies are more efficient than doing nothing (which is the only politically feasible alternative).

trhtrsh 14y ago
How would "pigovian taxes would be considered "government picking winners and losers" (specifically losers)." I mean, it would be, only in the sense that "criminal justice system picks losers, by arresting people who commit crimes".
othermaciej 14y ago
1) I read a lot of economics blogs and I see many economists who are against "government picking winners and losers" in the form of subsidies; but favor, e.g. revenue-neutral carbon taxes. There are strong economic reasons why the two are not at all the same. 2) Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases. Subsidy decisions are not guided at all by the info encoded in the price system, and are instead likely to be based on rent-seeking by favored interests groups. See <http://en.wikipedia.org/wiki/Economic_calculation_problem&#62 http://en.wikipedia.org/wiki/Economic_calculation_problem&#6...; Your original comment cited "basic economics" and implied that the government would be better than the market at "picking winners and losers" in the face of negative externalities. But that is not a consensus view among economists.
- rayiner 14y ago
  > Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases. In cases, yes. Given the sheer magnitude of thee externalities in environmental situations, not likely. We're talking trillions of dollars of implicit subsidies here.
  - othermaciej 14y ago
    I believe you are committing the "Yes Minister" fallacy: "Politician's logic: We must do something. This is something. Therefore we must do it." Direct government subsidies create deadweight loss, and by hurting the competitive position of companies and technologies that don't get the subsidy, they can actually make the negative externality worse. You can't justify a bad intervention just by pointing to the magnitude of the externality.