04 Feb 2019

## Yet Another Analogy on the Carbon Tax

We only have 12 years to act before I run out of analogies…

Try this one kids:

Should Students Support a “Point-Neutral Exam Reform?”

Suppose a college math professor is very concerned about the self-esteem of her students, and so declares that for the upcoming exam, she will give each student the average of the actual scores that the class earns. That is, the professor will first grade the exam the normal way, then add up the total points earned by all of the students collectively, then divide the total by the number of students in the class, and finally she will award that result as the score to each student.

When the professor announces the rule, at first the students are suspicious, as they have come to distrust anything proposed by adults—especially those in authority. However, the professor explains that out of the class of 100 students, there are 10 very high achievers, who get an A+ on every test. Another 87 students are pretty average, who all usually get a C+ through a B on their tests. And finally there are three students who are in danger of flunking, who get an F or a D on their tests.

The students in the class, however, still don’t see where this is going. The professor reminds them that her proposal is—as she calls it—a “point-neutral exam reform.” That is, the professor’s new scheme won’t create or destroy points, but instead will merely redistribute point among the students. The total number of points the students score on their exams, will end up being the total number the professor records in the grade report for the registrar.

However, because of the different patterns in student scoring, the professor predicts that her scheme will mean that 90 percent of the students in the class will receive more points from the scheme than they will forfeit. That is, 90 percent of the students in the class will see their score bumped up after the professor applies the adjustment.

#### 22 Responses to “Yet Another Analogy on the Carbon Tax”

1. David R Henderson says:

Each person’s incentive is not to study at all.

• Josiah says:

So by analogy under a carbon tax each person’s incentive is to not emit greenhouse gases. This hardly seems like a bombshell discovery.

2. Tel says:

It’s an analogy to show that incentives can change behavior, so in that sense it might be illustrative. It’s also something of a “Prisoner’s Dilemma” non zero-sum situation (i.e. if everyone optimizes by following the local gradient then everyone ends up worse off).

However, in terms of “does what it says on the box”, the ostensible purpose of a carbon tax and redistribution scheme is to create incentives that do change behavior. Therefore to the extent that it makes people give up their cars or use less electricity … that’s exactly what it’s supposed to do. That’s an intended consequence… whereas the study vs exam case is more of an unintended consequence (although there’s always room for cynicism and POASIWID).

However, because of the different patterns in student scoring, the professor predicts that her scheme will mean that 90 percent of the students in the class will receive more points from the scheme than they will forfeit. That is, 90 percent of the students in the class will see their score bumped up after the professor applies the adjustment.

Very likely the professor would get that prediction wrong … I suppose that illustrates the danger of ceteris paribus thinking in the face of deeply structural social changes such as widespread redistribution. There is a chance that alternative enforcement mechanisms might emerge out of desperation … for example the smarter students might coach the mid-level students to get their grades up, and then the bulk of the class brutally bullies the no-hope students until they quit the class completely. People can get creative.

3. KS says:

Offtopic (sorry if that’s inappropriate).
I’ve found this in my email few days ago. Reminded me about the great debate on this very interesting topic. Cheers!
https://www.themacrotourist.com/img/posts/06/20190124-mosler.png

4. Harold says:

“That’s an intended consequence… whereas the study vs exam case is more of an unintended consequence”

Yes, that is the point. Neither proposal makes any sense unless you take into account the consequences, intended or otherwise.

The difference is that with the carbon tax, when you take the consequences into account it makes the proposal better, with the exam it makes it worse (unless the prof. wants people to study less – and there are much easier ways to achieve this.)

It is also wrong to say “the real issue” was that students studied less. That was one issue, sure, but who is to say what the real issue was? Say for example the prof. decided to redistribute all the marks to the top 20% of students. Or the bottom 20%. Or just give everybody zero. That would certainly be an issue. Whilst the amount students learn is an issue, the signalling of the grade is also an important issue.

Picking out one aspect and claiming that is *the* issue does not tell the whole story.

• Tel says:

“Better” from some people’s point of view.

Intended consequence does not imply good consequence… but honesty about intentions is a reasonable place to start negotiating.

• Harold says:

Better for the person who implemented the policy. We would have to assume that the prof. wanted the students to study less if that consequence is viewed as better by the prof. It is such a convoluted method to achieve that result. It is very unlikely that the prof would consider this a good outcome when there are much better ways to get that result. Just don’t set an exam, for example. Whilst we cannot know what is going on in someone’s mind – especially a hypothetical person – we can make reasonable deductions.

Whereas the carbon tax is stated to be for reducing carbon use.

5. Harold says:

Also there is a deception smuggled in with the exam analogy.

Imagine there are 1000 marks total and 100 students. One student gets 350 marks, the next 19 get 510 between them (or 27 each on average) and the bottom 80 students get 140 between them, or slightly less than two each on average. The pass mark is a rather low bar of say 5 marks needed.

Most of the students are guaranteed a fail. On average marking, many more might get a pass, even if overall number of marks is reduced to say 800 rather than 1000.

Were I one of the 80% of students, I might well go for average marking.

• Bob Murphy says:

What’s the deception in the analogy, Harold?

• Harold says:

OK, deception is the wrong word.

6. Bob Murphy says:

EVERYBODY: The point of this analogy isn’t to say whether a carbon tax is good or bad; if you read the article, you’ll see I am agnostic on the “test reform.” (Someone like Bryan Caplan might say that students trying to outcompete each other on a signalling exam is a counterproductive arms’ race.)

Rather, the point is to once again underscore how misleading the WSJ open letter from 45 economists was.

This is the key point of the excerpt above, which I don’t think any of you have commented on:

“However, because of the different patterns in student scoring, the professor predicts that her scheme will mean that 90 percent of the students in the class will receive more points from the scheme than they will forfeit. That is, 90 percent of the students in the class will see their score bumped up after the professor applies the adjustment.”

7. Bob Murphy says:

To be more specific: When we’re trying to evaluate whether the professor’s “point-neutral exam reform” is good or bad, it would be a total non sequitur and hence very misleading for an advocate to say, “Well 90% of the students are getting more points than they’re giving up.” Yes that’s a true statement but it has nothing to do with the question, and it is also very misleading to someone who doesn’t think through the incentives.

• Silas Barta says:

So that’s it? The entire point of this misleading analogy was the (rather uninteresting) point that you can’t just endorse every policy where there are more winners than losers?

Well, no duh. I don’t think anyone was advocating that as an independent point in isolation. It’s more like, “unless you have a lifestyle that depends on you continuing to do a socially destructive thing [high carbon emissions]”, you, perhaps with trivial modifications to your life, will probably get money back, and won’t be penalized for general positive-sum trade as much. And that doesn’t describe very many people.”

• Bob Murphy says:

Did you have a bad day Silas? Holy crap.

It’s funny how everyone keeps paraphrasing what the economists actually said in the WSJ letter. They didn’t say what you wrote, they said 90% of American families will get more in a dividend check than they’ll pay in higher prices. I don’t know why it’s so hard for you guys to admit that that is grossly misleading. Tyler Cowen is apparently the only honest pro-carbon tax person on Earth.

• Bob Murphy says:

Silas wrote:

“…you can’t just endorse every policy where there are more winners than losers?”

Also Silas, you (apparently) missed the entire point, unless you are just being sloppy/quick in your writing. The point was, WE DON’T KNOW if the participants are winners or losers just from looking at the net change in exam points (or dollars paid in vs. taken out of a carbon tax system).

The cost of a carbon tax is not (merely) the number of dollars you send to Washington. If they imposed a \$10,000/ton carbon tax poor people wouldn’t pay any of that in transportation costs, because they would switch to zero-emission transportation (including possibly walking everywhere, depending on their situation). That wouldn’t prove they suffered zero cost in transportation.

8. Josiah says:

Bob,

If it makes you feel better, I get the point you are trying to make (saying that most people get more back from the dividend than they pay in higher prices overlooks the fact that people also not buying stuff that they would have otherwise because of the higher prices). However, if I hadn’t read your prior stuff on the issue I don’t think I would have understood you from this article because the analogy has too many distracting elements in it. So you can see how bad I am at trying to make you feel better.

• Matt M says:

Agree.

I think Bob’s overall point about the “unseen” losses from changing consumption habits is obvious to anyone with a decent understanding of Austrian (or even regular) economics.

That said, this does not include the vast majority of people, voters, or probably even readers of the Wall Street Journal (sadly enough). I suppose you might say “So what? Surely the economists themselves know this is bunk!” and well, I’d be inclined to agree, but I stopped expecting any official mainstream news outlets to maintain any shred of journalistic credibility years ago.

The average person simply doesn’t understand economics well enough to think past “The check I get back is bigger than the tax I paid, therefore I’m richer!” and the WSJ and the signed economists are taking advantage of that fact to dishonestly argue in favor of their preferred policy position. And at this point “News media finds academics to assist them in spreading misleading propaganda for the purposes of political activism” is really a “Dog bites man” story…

• Josiah says:

Mat,

Well, it’s not clear how big an issue this is, because we don’t know how many people would be worse off in this way. For example, suppose that a person would get \$900 in a dividend but the extra costs from the tax if he doesn’t change his behavior would be \$1000. A person could very well prefer that to the status quo, because his marginal consumption of gas and electricity aren’t that valuable to him, so he could easily cut back and come out ahead.

• Tel says:

Yeah, that’s right. There are some people who don’t know how to cook and enjoy cold food. We don’t know how many but hey, could be a lot.

Polar Vortex? Bring it on … I have darkness, blankets, and stored belly fat. Poke that \$1000 down the chimney, don’t worry there won’t be any fire going at my place!

9. Andrew in MD says:

This is common sense proposal to improve the self esteem of college students. I’m surprised that more universities aren’t adopting this policy. And if, for some reason, this scheme does not successfully improve self esteem by the amount desired, then the only reasonable explanation is that it does not go far enough. That whole “point neutral” element of the policy is just a compromise to get some of the more conservative students on board anyway. That part can be scrapped down the road if necessary.

10. Transformer says:

Bob says ‘The point of this analogy isn’t to say whether a carbon tax is good or bad’:

So lets say that for most people its neutral and the environmental benefits exactly match the fall in living standards. Then the only issue is how the tax revenue is distributed – so for someone trying to sell the idea of the tax saying that 90% of people will benefit from the way it is distributed seems like a valid selling point.

• Andrew in MD says:

So lets say that for most people its neutral and the environmental benefits exactly match the fall in living standards.

This is the kind of statement that vindicates the common sense mistrust that the average person has for economists.