Civil Engineering Reference
In-Depth Information
THE POLLUTER PAYS PRINCIPLE
A firm facing a charge or tax on pollution could respond in one of three ways.
•
It could install pollution abatement equipment or change production techniques
to reduce the amount of pollution.
•
It could reduce pollution-causing activity.
•
It could simply choose to pay the price to pollute.
The relative costs and benefits of each option for each polluter will determine
which one or which combination will be chosen. Allowing the choice is the efficient
way to decide who pollutes and who does not. In principle, each polluter is given
the incentive to meet the full social cost of their actions and adjust production
accordingly. In theory, there should be less environmental pollution and the price
paid by the consumer should increase. This is explained in
Figure 11.5
.
The pollution tax causes the supply curve S to rise to S
1
. The effect of the tax is
to increase the price of the good. As a result, the quantity consumed decreases as the
cost is higher for the purchaser. But the income received by the producer after tax is
paid to the government P
p
is lower than it was before the tax was introduced P
e
. The
environmental cost is therefore shared between the producer and the consumer of
the good. Their relative contributions depend on the slope of the supply and demand
curves. The more competition there is in the market, the less the consumer will pay.
IS A UNIFORM TAX APPROPRIATE?
Though taxation offers a way of forcing producers to take account of social costs,
it may not be appropriate to levy a
uniform
tax according to the physical quantity
of pollution. The same activities do not necessarily have an identical impact
everywhere - we must establish the amount of
economic
damage rather than the
amount of the physical pollution. A major motorway in London causes much more
economic damage than a motorway routed through a less populated area. There
are already innumerable demands on the air in London. Millions of people could
breathe polluted air and thereby incur health problems, such as sore throats and
asthma, which may even lead to premature death. Buildings would become dirtier.
A given quantity of pollution, therefore, causes more harm in concentrated urban
environments than in less densely populated rural areas. If we are to establish
some form of taxation to align private costs with social costs - to force people
to internalise externalities and to make the polluter pay - we somehow have to
come up with a measure of
economic
costs instead of
physical
quantities. Because
the economic cost for the same physical quantity of pollution varies according
to factors such as population density, the natural formation of mountains and
rivers, so-called optimal taxes on pollution should vary from location to location.
(Nonetheless, a uniform tax might make sense given that the costs of administering
a variable tax, particularly of ascertaining the actual economic costs, are relatively
high.) Either way, the dilemma a government faces is how much should it charge
for a 'permissible' amount of pollution and some light will be shone on this difficult
question in the next section.
