Measurement Problem
Arthur Pigou said in "It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of could interfere with individual choice." In other words, the economist's blackboard "model" assumes knowledge we don't possess — it's a model with assumed "givens" which are in fact not given to anyone. Friedrich Hayek would argue that this is knowledge which could not be provided as a "given" by any "method" yet discovered, due to insuperable cognitive limits.
William Baumol argues that it is extraordinarily difficult to measure the social costs of any externality, especially because many costs are psychological and individual. Even if a measurement of the psychological effect of some externality did exist, it would be impossible to collect that data for all individuals affected and then find the optimum output level. If experts could find the optimum output level, it would be easier to find the optimum Pigouvian tax level to achieve that optimum. In the end, Baumol argues that the best solution is to set a minimum standard of acceptability for negative externalities, and create tax systems to achieve those minimum standards. Baumol points out that government committees have a tradition of agreeing on minimum standards, so the practicality of this solution is reasonable.
Read more about this topic: Pigovian Tax, Criticisms
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