ABSTRACT
Imagine an airline, which produces trips with capital, labor, and noise as factors of production. Up until now noise has been an unpriced factor and the whole airline industry has adjusted to this free input. Now there is to be a socially chosen "effluent tax" on noise, by some sort of vote, legislative or referendum. The airline can do several things:
It can do nothing. "Let the people decide how damaging the noise is to their ears. We will act like competitive price takers, accepting whatever tax-price is given us."
It can write a letter to all its affected laborers and stockholders. "We are a convenient organizational device. We are polling you to find if all or nearly all of you have the same sensitivity to noise, suffering the same intensity of marginal damage. If so, you might like to establish an interest group and we can save you some organizational costs. Please write down your marginal damage on the enclosed card and return it to us, remembering to exclude indirect considerations, such as moving costs and temporary decline in the return on your equity if the tax is passed. The efficient social solution does not include these calculations."
It can do the same as in 2, with this change: "be sure to figure in your possible unemployment and decline in stock value. These may be short-run temporary losses offset by gains in the rest of the economy, but they are real losses to you. Vote your interests!"
It can write a letter to the employees and stockholders urging them to vote "no" and predicting dire consequences of the tax; and without consultation or permission from the stockholders, it directs operating funds into political activity until marginal costs equal marginal benefits, from the managers' point of view. Instead of a black box responding to their preferences, the firm treats its workers and stockowners as target groups for vote magnification for the firm's or the managers' preferences.
