Sunday, August 3, 2008

Guiding the Invisible Hand

As we all know by now, the end of the world is on the horizon. At least Al Gore says so. I’m also assuming we have all seen or at least read about the documentary that the former politician has been promoting. In case you haven’t, you might want to tune in to the Nobel Prize-Winning presentation that somehow managed to outshine a Polish woman’s story about saving approximately 2,500 lives during the Holocaust (she risked her life numerous times saving children from persecution, so Al Gore must be important!).

So what do we make of all this attention to the environmental concerns pertaining to Global Warming, and our responsibility in this ruination of the world as we know it? How do we go about saving the planet without having to resort to plan B (Captain Planet and Friends to save the day… oh, and the Earth, too)? I am a firm believer in classical, old-school economics. But in order to provide us with the correct policies to execute a solution to our current problems, I believe that some government intervention is necessary if our goal is to tackle the current environmental issues raised by Gore and others.

A carbon tax is a good start. Applying a Pigouvian tax on carbon emissions would provide the necessary guidance towards saving our environment while relying less on government in other areas. In theory, this is a win-win situation for citizens of any party. We can reduce the amount of carbon emissions while simultaneously increasing tax revenue, providing a possible double-dividend (assuming the politicians in Washington can properly allocate the revenues from a carbon tax). I like this solution for a number of reasons.

I strongly support small government, but I believe that it is the responsibility of the government to provide firms with the incentive to take into account not only their private costs, but also their damages to society. In addition, this policy would promote innovation by providing the incentive for firms to acquire new abatement technology relative to other pollution control policies such as command and control. It rewards firms to be more cost efficient however they choose to do so (i.e., less production, more abatement, better technology).

The tax revenue collected by the government could be used to fund more research and projects that will produce better and safer technology that will eventually become standard for all firms in order to be competitive.

Sometimes even the invisible hand needs guiding to help society achieve a more favorable outcome through a policy that forces industries to pollute less. And that’s coming from a “small-government” guy.

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