NCPA - National Center for Policy Analysis

Social Cost Taxes

June 7, 2002

Some self-appointed societal reformers advocate higher taxes on behavior that allegedly imposes uncompensated costs on society, such as smoking or eating high-fat foods. Citing the theory of social costs, reformers have argued that unhealthy behavior increases the demand for health care services and drives up the cost for everyone.

Critics respond that both conceptually and practically, there are serious problems with the theory of social costs, because there is no way to make use of it to implement efficient social cost taxes.

  • To calculate the appropriate tax, policy makers would need to know the personal and subjective preferences of both the consumers of the social cost-generating product and the individuals who are suffering from its use.
  • Policy makers would also need to have complete information concerning the value of the inputs used to make the products available to society in alternative uses.
  • However, this level of information is both practically and conceptually impossible to obtain.

It needs to be kept in mind, critics argue, that although most products generate costs for producers and consumers, those internal costs have no place in the social cost argument. By willingly making and buying the products, producers and consumers voluntarily bear those costs and demonstrate in the process that their benefits exceed their costs. It is only external costs imposed on third parties outside the market that may indicate market failure.

For example, by pointing only to the cost of certain behaviors - and by not distinguishing between internal (private) and external (social) costs - and by ignoring all benefits (e.g., individual enjoyment, enhanced personal security and crime reduction through legal product use), advocates of these taxes misapply economic theory, claiming that such taxes will actually enhance economic performance.

Source: Roy E. Cordato, "Social Cost Taxes on Unhealthy Foods and Bullets," Studies in Social Cost, Regulation, and the Environment No. 8, Institute for Research on the Economics of Taxation, February 2002.


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