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The ‘Fair-rewards Policy’ And The Cost-shared Lunch

Guest Column
David Gordon Wilson

If a group of, say, 24 people of modest means have lunch together regularly but pay individually, they are likely to choose some form of economy special, for instance an egg-salad sandwich for $2.99. But if someone suggests that, to save time, the waiter should put everything on one bill and then everyone pays an equal share, someone will quickly find out that she/he can order a double-lobster for $26.99, but the bill for each person increases by only a dollar. The cost-shared lunch is a bargain -- until everyone else discovers the same truth, everyone has lobster, the cost-shared bill for each becomes $26.99, and people are asking each other, “Why is eating out suddenly so expensive, and why am I putting on weight?”

The more altruistic are then likely to learn another lesson from the cost-shared lunch: that if one person returns to having the egg-salad sandwich, her/his bill is reduced by only a dollar.

This analogy applies very closely to our present situation. The incentives to wasteful activity nationwide are greatly increased when the cost is shared among 280 million people, because the “increase in the bill” from one person’s selfish actions is undetectable. Many of us drive SUVs and trucks because we, as a nation, have chosen (perhaps unwittingly) to share much of the cost of providing the roads, the fuel, and of the cost of the defense establishment needed to safeguard the sources of that fuel. We are sharing, also, the costs of the hostility of people who do not believe that we have a right to be there to defend what seems to them to be a gluttonous and hedonistic way of life. As a result of these low perceived prices and the consequent profligate consumption, the United States uses about a quarter of the world’s energy, and produces about a quarter of the world’s pollution. The same pattern is broadly true for electricity, natural gas, water, timber, and for the mining of minerals and fuels.

We teach our students to look at all possible solutions to problems, including those at the ridiculous extremes, and to pick an optimum somewhere along the spectrum. One ridiculously extreme solution to the problem of energy shortages is rationing and regulation of everything, as practiced by the former Soviet Union. We know that that doesn’t work, there or here. The other extreme, not ridiculous but highly flawed, is a completely free market. However, most technological developments bring about benefits to the users, and penalties or costs, so-called “externalities,” to nonusers. The use of fossil fuels in motor vehicles brings about a host of externalities, including pollutant emissions, usage of finite resources, accidental injury and death to non-drivers, increased defense costs to pay for “our” oil supplies, huge losses of time and a great reduction in the quality of life for nonusers, and so on. Some economists have assessed just the quantifiable externalities as being on average between $0.60 and $1.00 per mile driven for every U.S. vehicle.

A simple energy tax to internalize these externalities would introduce other problems; poor people in particular would suffer. This has been a major reason why proposals for higher U.S. energy taxes (which would certainly reduce demand efficiently) have been repeatedly rejected: they would be “regressive.” Such a tax would also transfer enormous funds to the government to be used, mostly, for unproductive purposes, and it would be inflationary.

However, taxes on nonrenewable energy could be made progressive and popular if introduced properly. First, they would be imposed on a gradually rising scale over a period of months, perhaps years, so that individuals and businesses could plan ahead. Next, the proceeds of the taxes would be put into an impregnable trust fund, immune from being used for Congressional “pork.” The trust fund would be reduced to zero at the end of every month through rebates (via a negative income tax) allocated in equal amounts to every legal adult citizen in the country.

We could call this the “Fair-rewards Policy.” Because energy use and, therefore, the additional taxes paid, increase with wealth and income, the hypothetical “average citizen” would receive a rebate exactly equal to his or her energy taxes (assuming no change in his or her consumption, and assuming that the costs of the tax collection and distribution would be small). Rich and high-income people would receive a rebate less than their energy taxes. Poor people would, on the other hand, receive a rebate larger than their increased expenditures. They would get richer, and the tax would thus be progressive. Everyone, rich and poor, would have an incentive to reduce the use of nonrenewable energy and to invest in energy-saving measures. There would be a free-market boost for new-technology business, and employment would increase. Many government programs to develop better technology could be phased out. Traffic jams would decrease. It would become fashionable to walk short distances. Buses would run faster and more frequently. Energy supply and demand would come into balance. Welfare programs could be scaled back because everyone, including the poor, would now have something approaching a guaranteed annual income with no strings attached.

The same principles could be applied to shortages in other resources, including road space (congestion taxes would become feasible and popular), and to emissions (where the economics justified taxes to reduce pollution).

The fair-rewards policy would produce all kinds of incentives favoring socially beneficial activities, and would put the United States far ahead environmentally. We would have high employment and prosperity. We would no longer need Middle East oil, and we could bring our troops back home. Most of the irritants that produce militants would have gone.

David Gordon Wilson is a senior lecturer in the Department of Mechanical Engineering.