Monday, June 14, 2010

If you do it to yourself, is it an externality?

There has been brief discussion of taxing soda in an effort to pay for health care costs. There is some intrinsic sense to this, that the high sugar content puts you at greater risk of developing diabetes or obesity, and that the tax would prevent some people from developing the habits that lead to the diseases and pay for the treatment of those who are not deterred.

Strictly speaking, this is not an externality. The negative effects of the sugar overconsumption are primarily borne by the individual, not the community (though I might argue for a theory that would imply greater interconnectedness than most economists', I'll give them the benefit of the doubt for the sake of discussion). The word "internality" was anonymously proposed as a name for this effect, the negative effects with which we unexpectedly burden our future selves. The community bears the costs not essentially, but only when we've chosen to socialize medicine, wholly or in part, i.e.:

A third type of externality is a governmental financing externality, in which the activity of some people impose a cost on others because they are forced to pay taxes to pay for that activity. That applies to the consumption of unhealthy food when taxpayers pay for the medical costs.

Mankiw asks, however, "To what extent should we view the future versions of ourselves as different people from ourselves today?" i.e., is it right to correct our near-sighted cognitive biases with taxes, to make you internalize the cost you will bear in the future today? Should the additional tax reflect the future cost, or merely our bias in understanding the future cost?

Even if this is not practical, it might be of benefit to our quality of life to try. Certainly, as Mankiw agreed, we should start by eliminating corn subsidies first, rather than taxing the products that contain its high-fructose syrup.

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