Pigovian taxes

A pound of tobacco costs $200 in NYC.

Pigovian taxes are taxes levied on transactions or entities to re-associate "externalized" costs back to the transaction.

In plain English, some transactions involve a third-party who has no voice in the transaction.

Suppose you pay a sixteen-year-old to take a load of plastic trash (vinyl floor tiling, old computers, etc.) to the dump. Rather than going to the dump, the kid  burns it in a bonfire in his dad's backyard.

In this case, the third party is the person who is down-wind of the bonfire and breaths the toxic smoke.

You made a profit because you found a cheap way to unload the trash. The kid made a profit because he got rid of it for even less than you offered him.

But what about the person whose COPD gets worse or the neighbor whose chances of getting cancer just went up by an infinitesimally small amount?

The economist who favors Pigovian taxes will propose a tax on bonfires. His logic is that the public currently bears the cost of the health issues associated with burning trash and it is fairer to levy that cost against people addicted to bonfires than to encourage that behavior by allowing the cost of bonfires to be "artificially" low.

A pound of tobacco in NC or KY varies between $0.75 and $2.00

A pound of tobacco in Zimbabwe can be as low as $0.10 but averages about $0.80

Advantages of Pigovian taxes
When Pigovian taxes work, they work very well.

Consider a European Union tax assessed on automobiles to capture their lifetime costs, including the cost to recycle.

Now imagine the engineers and beancounters at VW, for instance, looking at that cost (perhaps as much as €5000 per unit) and swooning.

They are already designing the product to be easy to assemble, to be crashworthy, to be economical to operate, reasonably easy to maintain and be affordable to buy.

What is one more criteria? Suppose they went to the regulator, hat-in-hand, and proposed reducing the number of polymers (plastics) from 78 down to fifteen. Furthermore, suppose they proposed molding all non-appearance plastic parts so each polymer was color-coded to make them easy to sort.

In fact, if the colors were different enough, the car could be ground up and the plastic pieces run down a conveyor and each polymer could be air-blown off the line in zones based on a "vision" system. And if a "vision" system was used, some of those colors could be in the IR or UV band so even "appearance" parts could be coded.

If the regulator was reasonable, he would reduce the recycling cost on all models VW sold that incorporated those changes. If VW received €400 per vehicle relief on the tax, then all of the other major players in Europe would be forced to follow suit.

Pigovian taxes have weaknesses
If taxes on cigarettes are the classic case of Pigovian taxes, then why do they vary so much?

Local taxes on a package of cigarettes sold in NYC adds $5.85 while that same package of 20 cigarettes only carries a burden of $0.36 in the Great State of Missouri.

Are the people in Missouri that much tougher or are the hospitals able to deliver healthcare that more efficiently than New York City?

It is not the math, it is the people
There are four major flaws with Pigovian taxes

In the United States there are several defensible (GAAP recognized) ways of calculating costs. You tell me to calculate the cost and I have to ask you "What cost do you want me to calculate?"

There is no mechanism in the way most government budgets are set up to guarantee that incremental revenue from Pigovian taxes will result in a one-for-one increase in the budget currently bearing the externalized costs or be remitted back to the individual victims.

Money is fungible. Politicians (Poly = many, tick = bloodsucking arachnid) being what they are, are congenitally incapable of NOT taxing sources to maximize revenue.  The defensibility of Pigovian taxes is the one-for-one linking to externalized costs. Politicians see any new tax as fair game for rewarding faithful spear-carriers and favored groups, regardless of the lack of any linkage back to the externalized costs.

Pigovian taxes can result in extreme distortions in markets. A package of cigarettes retailing for $13 in NYC has $0.05 of African tobacco in it. That creates a HUGE incentive to find ways to bypass the tax. Eric Garner died when arrested by police for selling "loosies", that is, individual cigarettes that MAY have been purchased in Virginia ($0.30 a pack) or a Native-American reservation. The police were enforcing a law enacted specifically to curtail people attempting to bypass NYC's Pigovian tax on packages of cigarettes.

NYPD officers approached Garner on July 17 on suspicion of selling single cigarettes from packs without tax stamps. After Garner told the police that he was tired of being harassed and that he was not selling cigarettes, the officers attempted to arrest Garner.    Wikipedia

Bonus link Half of Zimbabwe farmer revenue (not profit, revenue) goes to taxes with no discernible benefit to farmer. Zimbabwe is critically short of food and farmers are not planting fields to avoid taxes.