137
See also: The tax burden 64–65 ■ Markets and social outcomes 210–13 ■
The theory of the second best 220–21 ■ Economics and the environment 306–09I
f a supermarket threw old
boxes into a nearby garden to
save money on waste disposal,
they would clearly be responsible
for clearing it up. However, when
the damage is less obvious but has
a cost to society—such as air
pollution from a factory—can the
market system devise a solution?Taxing polluters
In the 1950s economists began to
refer to such costs as externalities
because these costs aren’t reflected
in market prices and affect third
parties. This is a market failure:
because the factory doesn’t have to
face the true social costs of its
actions, it will create too much
pollution relative to what would be
socially efficient. British economist
Arthur Pigou argued that the way
to deal with this was to tax the
polluter. This “Pigouvian tax,” as
it came to be called, was intended
to ensure that the full costs
of pollution were factored into the
polluter’s decisions so a business
would only pollute if buyers were
prepared to pay for the damage.Governments now use this idea in
policies such as carbon taxes to
reduce carbon emissions. As well
as being economically efficient,
many believe that it is morally right
to make the polluter pay, and shift
the responsibility for the problem
to business. However, imposing
a Pigouvian tax is not simple. As
Pigou himself pointed out, correctly
estimating the true cost of pollution
is not a trivial matter. ■INDUSTRIAL AND ECONOMIC REVOLUTIONS
MAKE THE
POLLUTER PAY
EXTERNAL COSTS
IN CONTEXT
FOCUS
Economic policy
KEY THINKER
Arthur Pigou (1877–1959)
BEFORE
16th century London
households are forced to pay
for sewage cesspits in their
own houses, rather than throw
sewage into the streets.
AFTER
1952 British economist
James Meade tells a fable
of beekeepers who received
no benefit from their bees
pollinating nearby orchards, so
stopped raising enough bees.
1959 British economist Ronald
Coase argues that the way to
cope with external costs is to
focus on property rights so
that pollution is owned and
its costs negotiated.
1973 James Cheung shows
the fable of the bees to be
false since apple-growers
and beekeepers do negotiate.
In general, industrialists
are interested, not in
the social, but only in the
private, net product
of their operations.
Arthur Pigou