[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

the socially optimal level of production. The tax, t, increases the firm’s costs of producing
steel, shifting up the market supply curve. The new market equilibrium is
now at the socially optimal quantity Q s . The equilibrium price is p s ; purchasers of
steel pay a price that correctly reflects the social cost of producing steel. Doing so
ensures that the marginal benefits are set equal to the marginal costs. Steelproducing
firms receive the market price less the tax, p s – t, an amount that equals
their private marginal cost of producing steel.
Taxes on pollution are similar to fines for violating regulations in one respect—
both increase the cost of and thereby discourage pollution. But taxes differ from regulation
in a fundamental way. Regulations are a clumsy tool. They penalize firms for
polluting over a specific level, but polluters who stay just below that level get off scotfree.
Pollution taxes can be set so that they reduce aggregate pollution by the same
amount as a regulator would under a command and control system. But the economic
effects are very different. Taxes add the cost of pollution to the costs that a
company has to cover to remain in business. As a result, companies have an incentive
to reduce their pollution as far as possible and to find new, low-cost ways of reducing
pollution or to devise new production methods that are less polluting, rather than
keeping pollution just below the legal standard. This is “efficient pollution abatement,”
as the producers who pollute less gain their reward in lower costs.
Subsidies such as tax credits for pollution-abatement devices are an alternative
way of providing incentives to reduce pollution. Subsidies are economically inefficient.
Take the case of steel firms. When they receive subsidies, firms are not paying the
full costs. Part of the costs are being picked up by the government. Producers therefore
can sell (and users can buy) steel for less than its full cost of production, and
steel and pollution production thus remain above the socially efficient level. Clearly,
firms prefer subsidies to taxes.
THE MARKETABLE PERMIT RESPONSE
Still another approach to curbing pollution is marketable permits. Companies
purchase (or are granted) a permit from the government that allows them to
emit a certain amount of pollution. Again, the government can set the amount so
that the company produces the same level of pollution as it would under the command
and control approach. However, companies are allowed to sell their permits.
Thus, if a company cuts its pollution in half, it can sell some of its allowance
to another company that wants to expand production (and hence its emission
of pollutants).
The incentive effects of marketable permits are very much like those of taxes. A
market for pollution permits encourages development of the best possible antipollution
devices, rather than keeping the pollution just under some governmentset
limit. If the government wishes to reduce pollution over time, the permits can
be designed to reduce the amount of pollution they allow by a prescribed amount
each year. In the United States, this sort of shrinking marketable permit was
used to reduce the amount of lead in gasoline during the early 1980s. Variants of
this idea have recently been adopted to help control other forms of air pollution,
such as sulfur dioxide.
POLICY RESPONSES TO PROBLEMS IN THE ENVIRONMENT ∂ 413