Economic policy
Arthur Pigou (1877–1959)
16th century London households are forced to pay for sewage cesspits in their own houses, rather than throw sewage into the streets.
1952 British economist James Meade tells a fable of beekeepers who received no benefit from their bees pollinating nearby orchards, so stopped raising enough bees.
1959 British economist Ronald Coase argues that the way to cope with external costs is to focus on property rights so that pollution is owned and its costs negotiated.
1973 James Cheung shows the fable of the bees to be false since apple-growers and beekeepers do negotiate.
If a supermarket threw old boxes into a nearby garden to save money on waste disposal, they would clearly be responsible for clearing it up. However, when the damage is less obvious but has a cost to society—such as air pollution from a factory—can the market system devise a solution?
In the 1950s economists began to refer to such costs as externalities because these costs aren’t reflected in market prices and affect third parties. This is a market failure: because the factory doesn’t have to face the true social costs of its actions, it will create too much pollution relative to what would be socially efficient. British economist Arthur Pigou argued that the way to deal with this was to tax the polluter. This “Pigouvian tax,” as it came to be called, was intended to ensure that the full costs of pollution were factored into the polluter’s decisions so a business would only pollute if buyers were prepared to pay for the damage. Governments now use this idea in policies such as carbon taxes to reduce carbon emissions. As well as being economically efficient, many believe that it is morally right to make the polluter pay, and shift the responsibility for the problem to business. However, imposing a Pigouvian tax is not simple. As Pigou himself pointed out, correctly estimating the true cost of pollution is not a trivial matter.
"In general, industrialists are interested, not in the social, but only in the private, net product of their operations."
Arthur Pigou