One way to protect the environment, and make sure that companies are held accountable for their actions, is through a Pigovian tax (also spelled Pigouvian).
A Pigovian tax is a tax on businesses based on the negative impact their products or services have on society. For example, if a company pollutes the air, it would be subject to a Pigovian tax.
The purpose of the Pigovian tax is to discourage the company from producing externalities by making it more expensive, hopefully reducing the amount of damage the company causes. They can also be used to help offset the cost of any negative externalities caused by said companies.
What Are Business Externalities?
Economists refer to “Business Externalities” as the cost or benefit that a company imposes on society from its business activities. Those costs are “external” to the company. You won’t see them on their budgets or accounting data.
Some examples of externalities that businesses don’t pay for include air or water pollution, polarization or diminished attention span possibly caused by social media, the cost to supplement employees who aren’t paid a living wage, and many more.
Unpaid business externalities are all around us, and they can cause a lot of damage to the environment, people’s health, and society at large.
While imperfect, Pigovian taxes are an attempt to have businesses pay for some of the damage they cause.
Are Pigovian Taxes Fair?
Some people might say that this is unfair to businesses. But, a Pigovian tax aims to level the playing field. It’s not fair that businesses can pollute the air and water and damage people’s health without having to pay for it. The Pigovian tax is an attempt to make sure that they do.
While they sound reasonable in theory, the trouble is that governments are notoriously bad at most things. Particularly when taxes, rules, and regulations affect a company’s profitability, politics and lobbying come into play. These can make the most well-intentioned legislation all but worthless.
What are the benefits of the Pigovian tax?
The Pigovian tax has several benefits.
Relatively low transaction costs associated with implementation – In certain situations, Pigovian taxes can be relatively easy to implement. All that is needed is to put a price on the externality in question. This can be done through subsidies, which tax the production of the good causing the externality and use the revenue to subsidize the purchase of the good.
Pigovian taxes are a way to hold companies accountable for their actions. By making it more expensive for companies to cause harm to society at large, the Pigovian tax can help to reduce the amount of damage that they cause. They can send a clear signal to businesses about the need to internalize their externalities
The Pigovian tax is also a way to raise revenue, which can be used to offset the cost of the damage caused by the company’s externalities. For example, it can also be used to fund environmental protection and clean-up efforts.
Problems with Pigovian Tax
While the idea behind them makes sense, there are a few potential drawbacks to implementing Pigovian taxes.
- Pigovian taxes can be complex and expensive to administer. It can be difficult to quantify the externalities of a particular company or activity. This means that Pigovian taxes may not be applied accurately, and some businesses may end up being unfairly taxed.
- Pigovian taxes may create disincentives for businesses to innovate and find new ways to reduce their negative externalities. Because they are paying for the harm, a business could feel less pressure to deal with the harm they are causing.
- Government picking winners and losers – When regulation affects a company’s profitability, it is difficult to keep out the influence of money. Companies that have mastered the art of lobbying would likely be able to reduce their taxes. On the other hand, companies that eschew political games could be unfairly targeted for not giving politicians money.
Overall, Pigovian taxes are potentially an effective way to hold businesses accountable for their externalities, but there are significant challenges that need to be considered before implementing such a system.
That’s why Less Bad is a big believer in using individual choice and the free market to let consumers hold businesses accountable.
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