Why taxing polluters is the right approach

Taxing polluters is a great way to avoid unnecessary and possibly cumbersome environmental regulations and easily account for market failures that result from negative externalities. Many environmental market failures result as a form of the tragedy of the commons; whenever you get a situation where an activity benefits one person, but the costs of that activity are spread amongst many people it is possible to get a market failure.

Take driving for example (and there are many more). As a driver you get the full benefits of driving, but the costs of the emissions that result from your driving are spread out amongst everyone.

This is a tragedy of the commons where the commons is the atmosphere and it results in a negative externality and a market failure. The driver when weighing the benefits of driving to work versus the costs, will most likely not take into account the cost of his emissions. Those costs are spread out amongst so many people that they are completely negligible to the individual. The driver will therefore likely decide that the reduced commute time is worth the cost fuel and drive to work. Unfortunately the costs of his emissions, added to the cost of everyone else’s emissions, are quite real. Taxing the emissions is one way for the driver to take into account the full cost of the emissions he is producing.

No one likes to pay taxes but properly applied they help prevent market failures are ensure that negative externalities are minimized.

UPDATE: Dr. Mark Jaccard, from the School of Resource and Environmental Management at Simon Fraser University was recently on Quirks and Quarks and he seems to agree with me.

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