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Polluter Pays Principle: Where There’s Smoke

Problem

Normally, when you make a purchase, you know exactly the cost of what you’re buying. We expect its price to reflect the cost of material needed to make it, the time of labor it took to make, and likely a bit extra tacked on so the seller can make a profit. You as the buyer accept that price, but what if the purchased good has adverse societal effects? That’s not factored into the original price. Furthermore, the consequences are affecting people who never agreed to the original purchase. It seems like an awfully unfair situation, doesn’t it?

Solution

One way to balance out the unfairness is to charge for the hidden negative public cost of the product or service. Of course, that then raises the question of who is responsible for paying such a charge. In terms of environmental law, a prevailing principle is that the polluter should pay.

Polluter Pays Principle

The polluter pays principle holds the individual or group who creates the pollution responsible for paying for the resulting damage inflicted on the environment. This principle can be put into action by such measures as a Pigouvian tax.

How It Works

In economic terms, pollution is a type of negative externality. A negative externality is an activity which generates an additional adverse effect on thirds parties, but not necessarily the individual who performs the original activity. Negative externalities create an undesirable, inefficient market. Thus to fix the market, the negative externalities must first be offset. 

Pigouvian taxes charge negative externalities. The amount taxed is set equal to the social cost of the negative externalities. After the Pigouvian tax is added, the product or service reflects the true price rather than just the private cost incurred by the purchaser. With an accurate cost now built-in, the market should be able to flourish both economically and ethically - at least, that was the theory economist Arthur Cecil Pigou had when he came up with the tax. In his essay The Economics of Welfare, he argued that a tax on negative externalities would prevent the otherwise inevitable overproduction of profitable goods that had adverse societal effects. Companies would be incentivised to slow down production or optimize their goods to have smaller negative externalities. Thus the market would remain in equilibrium.

Why Care?

It’s hard to perfectly implement the polluter pays principle. First of all, there’s the issue of how to monetarily calculate social ills like pollution. Furthermore, there’s the question of whether to give the bill to the consumer or the company. For example in the US, there’s a flat tax on gas. In this case, polluters are technically paying - consumers are covering the social bill for choosing to use fossil fuels. But with a flat tax, it’s disproportionately affecting those with lower income. Not to mention such a tax only encourages individual buyers to limit their use of automobiles - it does nothing to incentivise companies to make more efficient automobiles or to produce alternative energy sources for them. 

Billing companies presents its own issues as well. Considering a lot of big and environmentally irresponsible corporations are some of the most powerful and persuasive lobbyist groups, the legislation passed has tended to lack teeth. The US Environmental Protection Agency (EPA) itself has reported that the polluter pays principle usually isn’t fully implemented in American laws, policies, and programs. 

All this isn’t to say that there hasn’t been any success with the polluter pays principle. There’s been plenty of important pollution control laws implemented, from the Clean Air and Water Acts to the Resource Conservation and Recovery Act as well as Superfund law. In general, legislation at the state or local level tends to be more successful at implementing the polluter pays principle than that of the national level.

It’s important to remember that it makes economic sense for producers and direct consumers to not care about negative externalities like pollution. The polluter pays principle adds an incentive to care and then minimize or eliminate harm caused to the environment.  As production marches on, a huge debt is being racked up in our planet’s atmosphere, waters, and terrain. It begs the question, who’s going to pay it off?

Think Further

  1. Can you think of any other examples of legislation informed by the polluter pays principle?
  2. What’s another way beyond Pigouvian taxes in which the market can be incentivized to go green?
  3. How might the guiding ideas behind the polluter pays principle be more effectively implemented?

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Learn More

  1. Ambec, Stefan and Lars Ehlers. “Regulation via the Polluter-pays Principle.” The Economic Journal, vol 126, issue 593, June 2016, pp 884-906. Doi: 10.1111/ecoj.12184.
  2. Fleischer, Victor. “Curb Your Enthusiasm for Pigovian Taxes.” San Diego Legal Studies Paper No. 14-151, Mar 2014.
  3. Gaines, Sanford E. “The Polluter-Pays Principle: From Economic Equity to Environmental Ethos.” Texas International Law Journal, vol 26, no 3, 1991, pp 463-496. 
  4. Mamlyuk, Boris N. “Analyzing the Polluter Pays Principle Through Law and Economics.”  Southeastern Environmental Law Journal, vol 18, no 1, Sept 2010.
  5. Nash, Jonathan Remy. “Too Much Market? Conflict Between Tradable Pollution Allowances and the ‘Polluter Pays’ Principle.” The Harvard Environmental Law Review, vol 24, no 2, Jan 2000, pp 1-59.