Why taxes and snooker rules are not that different


Pretty much anyone with even the sketchiest understanding of economics knows that a competitive market is the mother of all driving forces for efficiency. In fact, Kenneth Arrow and Gérard Debreu have a mathematical proof called the Arrow–Debreu model which shows that if the conditions are propitious in terms of a competitive free market there will be a general equilibrium between total supplies and total demands reflected in a set of prices. Obviously there are all sorts of reasons why the reality isn't the case, and that's largely due to all the ways in which politicians interfere with the natural mechanisms of prices (taxes and price controls are two prime examples). Like others at the ASI, I am not unfriendly to some form of government - but one of the primary rules of thumb is that in most cases an interference in the market that upsets the natural price mechanisms created by supply and demand is an inefficient interference.

For a more generalised indicator about when it is likely to be bad to interfere in the market in terms of negatively affecting people's behaviour, consider the game of snooker as an analogy. I used to play in two types of snooker league: the open league and the handicap league. In the open league both players would start the game on zero, and the best players had the best chance of winning. However, in the handicap league, based on a points system conditioned by past results, better players would give inferior players a head start in an attempt to narrow the gulf in ability and make the frames more evenly contested.

The handicap league works because even though the points are differentiated at the start of play, both players are still incentivised to try their hardest and play to the best of their ability. A handicap snooker league in which poorer players were given more of a chance by the better players being compelled to deliberately play below par would be no fun for either player.

The snooker handicap league can provide a pretty good illustration for when governmental interference in the market is good and when it is not. Policies that cause the participants in the market (snooker players) to waste opportunities (play below par) are likely to be bad policies, whereas any policies that cause as few wasted opportunities as possible (in a way that's similar to handicap scoring) are less likely to be bad policies (note: pretty much all taxes and price controls cause some loss of efficiency, so that's why I said 'cause as few wasted opportunities as possible' rather than 'cause no wasted opportunities').

To translate that in market terms, taxes or price controls that change behaviour in a way that diminish efficiency are undesirable. A price control on renting apartments is going to negatively affect property development and create a shortage (which ironically makes renting apartments more expensive). This is the snooker equivalent of making players play below their best ability. On the other hand, taxes like inheritance tax or savings tax or consumption taxes on goods to which consumers are relatively price insensitive, while not without some behaviour-changing costs, are more like the snooker equivalent of handicapping - they don't greatly diminishing anybody's drive to perform well. And let’s not forget, some taxes, such as taxes on negative externalities like pollution and congestion are taxes that can change our behaviour for the better.

The upshot is, whenever you consider a tax, a price control, a subsidy, or any other kind of government involvement in the market, it is good to consider whether it is a solution akin to adjusting the starting scores in a handicap snooker match, or whether it is akin to asking some snooker players to perform below the best of their ability. The closer that government involvement is to the latter, and the farther away it is to the former, the less good for society it probably is.