Pricing Pollution

Ted Gayer of Brookings has a nice essay on the topic.

He says there are two ways to control/check pollution:

  • Govt. command-and-control which is more common but is inefficient. It does not incentivize firms to think and lower pollution. Just follow the government orders.
  • Market mechanisms to control pollution with government framing proper rules and regulations. In market mechanisms he discusses pollution tax and cap and trade system.

But obviously, he favors the market mechanisms to control pollution.

At its core, the problem comes down to applying market pressures in an arena in which property rights do not operate as they do in the rest of our economy — and in which markets therefore often need some help to function properly.

Under these circumstances, some version of a pollution tax or cap-and-trade system is likely to be the best way to attain environmental benefits while minimizing the costs to American producers and consumers. It is also the form of environmental regulation best able to keep direct intervention by government at a minimum. Given the alternatives, friends of markets and limited government would be wise to move beyond the negative associations caused by the recent debate, and to give market-based environmental regulation another look.

Read the paper for further details.

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