India to apply Dr. Interis’ teachings

From CNN Money: India Slaps New Taxes on Cars to Curb Pollution

The tax hikes were unveiled as part of India’s annual budget on Monday by Finance Minister Arun Jaitley, who described pollution and traffic in Indian cities as “a matter of concern.”

Buyers of small cars will now pay a tax of 1%, while diesel cars will be taxed at 2.5%. SUVs and vehicles with bigger engines will be hit by a 4% tax.

Thirteen of the 20 most polluted cities are in India, according to air quality data released by the World Health Organization in 2014. India’s capital New Delhi, which is home to more than 20 million people, topped the list.

As I teach in class, pollution from vehicles is an example of a negative externality. When people drive around in vehicles, the emissions affect not only the buyer and seller of the vehicle, but others as well. Because it affects these “others” who are external to the market transaction, it’s called an externality. And because people think pollution is bad all else equal (exception: Elmer Fudd as Siegfried in What’s Opera Doc?*), it’s a “negative” externality.

I also teach that a possible way to increase economic efficiency in the presence of a negative externality is to impose a tax which discourages the action that creates the externality. In this case, India is imposing a bigger tax on vehicles which pollute more, all else equal, to discourage purchases of higher-polluting vehicles. Although,¬†as my colleague and former adviser Tim Haab says here, there’s a much more straightforward approach to address the problem.

* Smooooog! See 5:39 here.

HT: Dr. Freeman