Increasing urbanization and industrialization can exacerbate pollution problems in developing countries. Tax revenues in developing countries are too low to support adequate infrastructure for treating and disposing of wastes, but the problem is also attributable to the classic problem of externalities in productiion and consumption."Externalities"means that the costs of environmental degradation are not considered by the private decisionmakers undertaking the activities that cause the problems. Two types of policies are commonly considered to correct this market failure and improve the allocation of resources: command-and-control policies (such as emmission and abatement standards) and market-based incentive policies (such as emissions charges, taxes on production and consumption, and marketable pollution quotas), which raise the price of such activities for the perpetrators. Market based incentives theoretically reduce pollution at least cost and increase government revenues, but may require costly monitoring to be effective, and are usually implemented in an environment of imperfect information about the costs of abatement. Sometimes command and control policies make more economic sense in this environment. Efficiency gains from curbing pollution in developing countries may be large. Some polluting activities are subsidized, so curtailing them brings both fiscal and environmental benefits. Taxing polluting inputs and outputs is a particularly attractive policy in developing countries which often lack experience in administering and enforcing other types of environmental regulation. Corrective taxes make use of existing administrative structures and increase tax revenues, which can be spent on public goods to improve environmental quality (including treatment facilities for water and sewage, waste disposal, and sanitation) or can be used to reduce other taxes (which are often highly distortionary in countries with a narrow tax base). Which goods and inputs to single out for corrective taxation depends on the main sources of pollution, which varies from country to country. Air pollution from vehicles is growing in many countries where increased fuel taxes, perhaps coupled with improved regulations for vehicle maintenance, may be desirable. Higher taxes on high sulphur coal would curb both industiral and household emissions of sulphur dioxide. Charges can be implemented for fixed site easy to monitor industrial emissions. Subsidies to industries that cause pollution should be phased out and those industries should be subjected to higher than average tax rates.
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