Pollution Tax for Controlling Emissions from the Manufacturing and Power Generation Sectors: Metro Manila

Dasgupta and Maler (1991) ruefully observed: "The fact that for such a long while environmental and development economics have had little to say to each other is a reflection of these academic disciplines; it does not at all reflect the world as we should know it." Fortunately for us, environmental concerns are now in the forefront of discussions on economic growth. While the manifestations of environmental abuse would differ depending on the conditions of each country, they are generally of two kinds: (i) those that arise primarily because of poverty and population growth; and, (ii) those that arise from increased industrialization and urbanization leading to the pollution of water, air and soil. The latter is the subject of the current endeavor. In the course of producing (and consuming) commodities, negative or beneficial side effects arise that are borne by the economic agents not directly involved in the production or consumption of the commodities. Broadly defined, an externality is a relevant cost or benefit that individual economic agents fail to consider when making rational decisions. Externalities drive a wedge between private and social costs or benefits and therefore, prevent the attainment of economic efficiency and Pareto efficiency. However, the collective effect of ignoring externalities is socially undesirable. Without any corrective action taken to internalize externalities, resources will not be allocated efficiently, even if the economy is otherwise competitive. Externalities may be internalized by government intervention through different avenues: i) Pigovian taxes or subsidies; ii) through voluntary agreements between individuals involved (e.g., tradable emission permits); and, iii) control of quantities of polluting inputs or outputs that would otherwise prevail in an unregulated market.