What if liquor and other sin goods had to be purchased with a different currency called B(ad) Rupee?
Similarly the government could depute other goods – some not desirable (say imports) or those that cause environmental damage or have negative consequences, such as fuel – to be purchased solely via B rupees.
There could be a small tax or fee to convert A rupees (or rupees; those to be spent for neutral or desirable products) to B rupees, or vice versa. That said, the tax to convert A to B rupees could be higher so as to discourage consumption of sin or undesirable or negative goods.
The convertors of these two rupees, say banks or specified financial institutions would in turn pay it back to government after covering their transaction costs. In addition, the government could also set limits on the amount of B rupees that could be converted, or extinguishing periodically certain units of B rupees in the system. Perhaps this would see B rupee loans or borrowings increase as those with large holdings of B rupees lent it to those needing B rupees.
Advantages
Now you may wonder what is the need for all of this? Aren’t taxes a more efficient way of discouraging negative goods. I do think so. But then this is not a replacement for taxes. Higher taxes could be levied on negative goods and still the B rupee policy could hold. That said delineating the spend for alcohol or tobacco in bad rupees makes us more conscious when we are spending on it, in a way that higher taxes alone can’t do.
The good rupee / bad rupee could also help us better split the national product / GDP into those for positive and negative goods. Why does this matter? Well, the peculiarity of national income accounting is that a nation of healthy cyclists will have lower total national income than a nation of unhealthy car drivers, all other things being equal. Here is where the good rupee / bad rupee split could help us get better visibility into the good GDP / bad GDP numbers.
How would the creation of these two rupees impact those selling negative goods like alcohol or tobacco who earn in B rupees? Now they have expenses such as salaries, or spends on raw materials. Would they have to paid in A or B rupees? Well, ideally you would want those selling raw materials or services to manufacturers of sin / bad products also to earn in B rupees. So that they too suffer a conversion tax and undergo the inconvenience of having to convert the majority of their holdings to A rupees. So if you are an executive working for a dairy co, you will earn in A rupees, while if you join an alcohol retailer you will earn the same salary (or a higher salary perhaps) in B rupees.
All of this would make those working for the B economy so to say a lot more conscious that their products cause harm either to the body or the environment.
Disadvantages
It is interesting that no country has thus far tried this experiment. There are a few countries like China and Cuba that have two currencies, but these are more to do with convertibility / peg to the dollar. One reason may well have been the sheer challenge of making it work in the pre-digital era, but now that we are going digital, surely pulling this off would be easier. The other has to do with the convenience of taxation which is one way to regulate the growth of negative goods; though taxes are fairly blunt instruments – high prices do deter, but they do not raise consciousness of negative products like a bad rupee does. And nor do taxes deter manufacturers or workers in negative goods industries from working in them, the way a bad rupee model can deter them, or at least make them conscious.
One challenge with this model is the sheer power it gives to the government to interfere in the functioning of the economy. One government could declare fast food or high sugar products to be negative goods paid by B rupees. Local mithaiwalas would protest and the government will be force to delineate them as kosher, and so on.
Another would be the sheer logistics of managing these two currencies. Yes, making B rupees digital is one way to manage this, but that also means that you are making it inconvenient for the poor to buy liquor, tobacco or similar negative goods. It is certainly a reduction in personal freedom.
***
This is intended as a thought experiment really. I am not a policy advocate, and nor do I think any one in the government is waiting to hear from me. So amuse me, what could be implications or second order effects – either supporting my thesis for a good / bad currency, or opposing it – that I am missing?
Thanks to R Sivakumar and Sujay Naik for their help critiquing it and pointing out the holes in the proposal. This is a silly proposal I know, but I thought I would put it out there, flaws and all, to see if an interesting discussion comes out of it.