Regarding externalities, I think the correct way to calculate Pigovian tax is as the value the rest of society will lose, provided that they can react to the existence of the externality. So, in Friedman’s example, the actual damage of pollution (and the tax to be levied on the steel mill) is only $50,000, because of the possibility to shift land use. Of course it does make it harder to evaluate externalities in practice, but the principle seems solid at least.
This seems to be relevant to calculations of climate change externalities, where the research is almost always based on the direct costs of climate change if no one modified their behaviour, rather than the cost of building a sea wall, or planting trees.
Regarding externalities, I think the correct way to calculate Pigovian tax is as the value the rest of society will lose, provided that they can react to the existence of the externality. So, in Friedman’s example, the actual damage of pollution (and the tax to be levied on the steel mill) is only $50,000, because of the possibility to shift land use. Of course it does make it harder to evaluate externalities in practice, but the principle seems solid at least.
This seems to be relevant to calculations of climate change externalities, where the research is almost always based on the direct costs of climate change if no one modified their behaviour, rather than the cost of building a sea wall, or planting trees.