Bryan Caplan Joins the Pigou Club
By Arnold Kling
Question: If signaling has negative externalities, could government action make matters more efficient?
Answer: Yes – government could tax education. Then everyone could get half as much education and still get the same job offers.
No, this is not Greg Mankiw’s Pigou Club, which wants to tax carbon fuel usage. But it is a proposal to tax an activity with a negative externality. Bryan argues that pursuing a degree as a signal to employers (the courses themselves having little intrinsic value) creates a negative externality, in that it forces others to do the same.
Another negative externality is what I call “segregation equilibrium,” in which parents want their children to attend schools with the children of affluent parents, so they select high-tuition schools because they are high-tuition schools.
Eight years ago, in one of my first essays on school vouchers, I wrote,
it is conceivable that we would want to enact a “luxury estate tax” on private school tuition. If the tuition is above, say, $20,000, some of the tuition might be taxed. The revenue from this tax could be used to increase the money that is available for vouchers for low-income parents.