Internalities

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 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 an 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 Internality.

Objections

Some people might be bothered, because I’m taking away people’s agency. However, I’d argue that I’m actually doing the opposite. People fall victim to well-known cognitive biases that stymie their ability to practice rational and good judgment List of cognitive biases.

What I’m trying to do is allow people to live better lives by their own standards. If anything, I’d interpret this as giving people agency.

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) Myerson.

You could argue that they’d invest the money, and so this is just the result of rational temporal discounting Time preference. However, there are two issues with that. First, Americans generally only save 5% of their income Bureau of Economic Analysis. 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 such taxes these taxes tend to be regressive, you can always just use the revenue you raise from them to help the most impoverished. However, there is a good reason to oppose uniform taxes on 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 generally be at least proportional to income.

Less intuitively, the same argument also applies to subsidies. For instance, in theory we should pay people money to exercise because it makes them live longer. Moreover, this theory implies we should pay the rich more per hour to work out than the poor. This might strike some people as wrong, but note (as is touched on in the above link) such subsidies should be structured in a way to not affect the after-tax income distribution.