I'm making an infographic about the negative externalities of driving, and I want to explain that taxation is not "just" a tool to get a desired effect; it's a price-correcting mechanism that internalises external cost.

What makes it difficult is that a lot of external costs are not monetary costs until they have been converted. (congestion through value of time, CO2 emissions through the estimated cost per tonne, noise through studies on how it affects house values and health, air pollution on estimated effects on health etc).

How can I explain this?

These are some ideas, but they are a bit flawed:

  • Sharing a restaurant bill with a random other person in the restaurant (when you are seated, you are told that a random other person at the restaurant will share your restaurant bill). This makes everyone spend and buy more than what they want. If you pay your own bill, you make sure everyone pays for what they actually want.
  • Your taxes are spent on vouchers to paying for gas. Would you rather want that voucher or more money through less taxes?
  • Accounting argument: If HR pays for IT's costs, more budget cuts will be made on HR, and IT will spend more
  • Being forced to pay through worse health, accident risk, sitting in congestion, higher taxes to pay for infrastructure or getting the choice to pay with your money instead.
  • Pigouvian taxes puts the responsibility of the complex decisions that involve being a good sustainable citizen from citizens to experts.
  • You pay liability insurance to pay for the costs of you potentially break something. Your insurance costs are dependent on how many people using the same insurance make use of it. You trust that people in general are equally clumsy as you if not less. Similarly, you pay taxes that help society function. This includes the healthcare costs of air pollution, noise pollution, car accidents and the time costs of congestion and the infrastructure spending on roads. Do you trust that other tax payers drive the same amount of kilometers as you?
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    $\begingroup$ I'm not sure analogies are a good way to explain negative externalities and price correction. My suggestion would be to start with examples of negative externalities where there is a clear financial cost to third parties. For example a factory discharging chemical waste into a lake resulting in loss of income to commercial fishers. And then go on to say that there are many other examples where it's not so straightforward to put a monetary value on the harm done. $\endgroup$ Jan 26 at 14:02
  • $\begingroup$ Nice question. But seems difficult to answer. A good analogy for one person could be traveling a few miles above the head of another. $\endgroup$
    – erik
    Jan 26 at 20:44


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