Another way to protect the environment

To see why, we need to consider why pollution is a problem. Economists identify the problem with pollution as an externality, meaning that firms or individuals are able to dispose of wastes as pollution into the air or water without paying for the resulting damage.

Competition ensures that prices reflect costs and guide behavior, but prices only reflect the costs which firms must pay. Prices of manufactured goods consequently reflect the costs of labor, raw materials and electricity, but not the damage from the firms’ pollution. Therefore, prices send an incorrect signal to consumers and firms. The same problem would essentially arise if businesses got to use any resource for free, for instance, if a printing business got free paper...