Internalities

[a longer post on the same topic is available here]

What is an Internality?

An externality is a widely accepted idea in economics. Basically, if I’m doing something that imposes costs on you, I’m going to do it too much "title": "Externality". For instance, if I’m a power plant that uses coal, then the burning of this coal pollutes the air and contributes to climate change. However, these costs are born by the public at large, not just me. As a result, I will tend to use more coal than would be socially optimal.

Not all externalities are bad. For instance, if a construction company is making a new house, they might choose to make it look attractive to boost what they can sell it for. This also benefits the surrounding homeowners, resulting in a positive externality.

Externalities are a established part of standard economic analysis. Classic economics dictates that governments are supposed to respond to negative externalities by taxing the behavior and positive externalities by subsidizing it. This is, for example, the rationale behind taxing carbon emissions, cigarettes, while subsidizing vaccines.

An internality is an extension of this orthodox idea. The thinking goes that we have good reason to believe that humans don’t value their future selves as much as their current selves. Moreover, it seems very reasonable to characterize this trait as a negative thing, given that it results in self-destructive behavior such as not saving for retirement, smoking cigarettes, and not exercising. Finally, this bias towards your present-self at the expense of your future-self can be treated, just as your bias towards yourself and against others can be treated: with taxes and subsides "title": "Internality".

Quantifying Internalities

According to one study, most people require between about 5 times as much money in 5 years as they do today to be indifferent (some of the evidence suggests the ratio is as high as 11, but I’ll be as conservative as possible) "title": "Discounting of Delayed Rewards: Models of Individual Choice".

You could argue that they’d invest the money, and so this is just the result of rational temporal discounting "title": "Time preference". However, there are two issues with that. First, Americans generally only save 5% of their income "title": "GDP & Personal Income". Second, even if you accept a generous 10% return on investment each year, that would suggest the “correct” answer is to value money today at 1.6 times the value in 5 years. So, if I take 1.6/5, I get about 0.3, suggesting that people only account for 30% of their future-selves utility.

This would suggest that for tax and subsidy purposes, we should treat your future self as 70% of a separate person. For instance, if owning a gun increases your chance of death by 1% in the long-run, we should view a 0.7% increase as unaccounted for by your decision making - meaning, we should use a tax to adjust for the bias.

As usual, if you oppose this idea because taxes these kinds of taxes tend to be regressive, just use the revenue you raise from them to help the most impoverished. However, there is a good reason to oppose uniform taxes of internalities. It's the same reason to oppose uniform taxes to internalize externalities, and that is: each dollar means more to poor people than to rich people. Instead, ideally, these taxes should be proportional to income.

There is one exception to this proportional-to-income-tax-and-subsidy scheme: behavior that isn't limited by income. In particular, exercise should be subsidized by the same amount regardless of income, because improving the health of a poor person is just as important as improving the health of a rich person. It's potentially more important to subsidize poor people exercising, because they're statistically more likely to undervalue the future-selves "title": "Stanford marshmallow experiment".

Works Cited [show]

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