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Ban vs Tax

April 9th, 2014

If there's something we think people shouldn't be doing, one approach is to ban it. Perhaps people are buying swimming pools, which then require large amounts of water, enough that at current prices there's not enough to go around. Do we say "no filling your swimming pool during the drought" or do we charge enough more for the water that people start to use less? Or say we're trying to reduce our carbon emissions to limit climate change. Do we require cars to meet certain fuel efficiency standards or do we set a high tax on gasoline, large enough to outweigh the environmental cost of the carbon emission?

These approaches, "banning" and "taxing," are often available as alternatives, and in different situations we choose different ones. We tax cigarettes but ban marijuana. You can ration permission to drive by license plate number or use congestion pricing. In general the "tax" approaches seem much better to me: charge a high enough rate to balance out negative externalities, and then use that money to do good things.

One situation where the "tax" approach is not well suited, however, is one where people are signalling wealth. For example, having a big green lawn demonstrates that you have the time and money to keep one up. In the neighborhood everyone can see your lawn, and the bigger and greener it is the higher your social status. Now say we have a drought. If we control usage by letting the price of water rise the green lawn remains a status symbol and people who can afford it continue to buy the water they need to keep theirs green. If instead we simply ban lawn watering, or restrict it to certain hours, people can no longer get an advantage in this particular status competition by spending more. Lawn verdantry is mostly positional; people don't benefit that much from the beauty of their lawn, instead it's mostly about how yours stands relative to your neighbors'.

Similarly, when the Communists took over China they were able to enforce a full ban on foot binding. This removed it from the realm of status competitions: all feet in a cohort were unbound and it lost its social role. If instead they had taxed it [1] there's a good chance it would have maintained that function, unless the taxes were so high that not even the rich could afford them, at which point you pretty much just have a prohibition.

We're definitely not going to be able to ban all positional goods and keep people from competing for status in zero- or negative-sum ways, but if people currently engage in a mixture of negative- and positive-sum status competitions then it does seem like there is at least the potential for using bans to improve this balance.

[1] Yeah, as Communists this was probably not an approach they considered.

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