Environment Taxes and User Charges

Market failure occurs when the social cost of producing and supplying certain commodities is not reflected in market pricing. This results in excess market supply and consumption. It could reflect pollution from factory smoke and actual cost of clearing the pollution not being factored into product price. The impact of pollution is a negative social cost or ‘externality’ that should be captured in market prices. Correct pricing should ‘internalize’ social cost of production and supply. Irretrievable proof has emerged that the atmosphere is being damaged through greenhouse gases punching holes in the earth’s ozone layer, leading to global warming or ‘climate change’ with significant inter-generational ramifications. Corrective measures include regulation, user charges, permits and taxes that attempt to equate, at the margin, the social cost of a supply with its social benefits, with relative advantages and disadvantages to using them. As the atmosphere becomes increasingly recognised as a global resource and, reflecting the rise in the use of mineral resources such as coal and petroleum products, the most prominent instrument is a global tax on carbon emissions. However, such taxes to mitigate global pollution have not met final success. These and related issues comprise the subject matter of this chapter.