Should the polluter pay Essay Example

Should the polluter pay? Paper On March 16, 1978, the oil tanker Amoco Cadiz ran aground off the coast of France, polluting two hundred miles of coastline. Though fifty-nine thousand tons of oil were spilled, only twenty-thousand were removed by refining plants. This led to the death of approximately twenty-thousand birds, nine thousand tons of oysters, and damage to other species. The oil spill damaged the pink granite in nearby areas, and ruined seventy-six tourist beaches. The incident, however, could have been avoided, if the captain of the ship had called a tug boat in time. This tug would have pulled his ship away from the rocks, thus preventing the incident. This example highlights the damage that a negative externality can have. What is an externality? It is the effect on a third party from the use or provision of a good or service. There are two kinds: positive and negative. Most of the externalities that make the headlines today are negative externalities, with examples including numerous oil spills, pollution by electricity companies and others. I believe that companies should be forced to pay for the negative externalities that they cause, either as taxes or being forced to solve the problem that they created. Every business has an obligation to ensure the well being of the community within which it operates. This involves solving or funding the solution of the problems that they make. This is the basis of R. Edward Freeman’s article â€Å"Managing for Stakeholders. † Freeman, a philosopher and professor, believes that companies are expected to be â€Å"good citizens † and should attempt to control any negative effects as efficiently as they can. He says that managing for stakeholders is all about providing â€Å"value † without resorting to the creation of negative â€Å"tradeoffs . We will write a custom essay sample on Should the polluter pay? specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Should the polluter pay? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Should the polluter pay? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer † I agree with Freeman on this point. If businesses can provide value without the creation of negative tradeoffs then society and the company would greatly benefit. Consumers today are much more socially conscious than ever before. If they have the opportunity to buy goods that are made in a socially responsible manner, a great number will be willing to pay the extra cost. This could potentially increase sales of the company and as a result profits would also go up. The scope of most laws designed to protect the environment from business activities is rather limited. They give companies the idea that a limited amount of pollution is okay. The same goes for laws created to control negative externalities. Companies should be forced to shoulder the costs of their negative externalities as this will force them to spend money to rectify their mistakes. While encouraging them to not make the same mistakes again, this will allow them to save money and reduce the creation of negative externalities as well. My view is also supported by N. Cristian Brown, a retired law professor and journalist, who wants the ideal company to be a socially responsible one. Brown also states that if businesses were forced to pay the full costs of operating, then they would realize that their businesses are too big to be profitable. Comparing a large company to a dinosaur, naming it â€Å"Econosaurus Rex,† Brown shows us her belief in the destructive nature of large corporations. She strongly feels that only government intervention will be able to solve the problem. Brown’s article is in direct contrast to Gene Callahan’s article â€Å"What is an Externality? † Callahan, an author, believes that the free market will be able to take care of any externalities arising from the operation of a business or an industry. He is a believer in Nobel Laureate Ronald Coase whose analysis states that as long as property rights are clearly defined, and the cost of enforcing these rights is relatively low, the people who are affected by this can agree with the company on how to internalize the externality. The people of the area will know best on how to internalize any externality, as they are the most familiar with their surroundings and will be the most inclined to get them back to what they used to be. This gives them a rather large stake in the enforcement of property rights. But the main problem with property rights is that they are very hard to define, which is why they cannot be implemented easily. For example, if a company pollutes a river by dumping toxic waste, and property rights are defined for a certain stretch of the river along which a town lies, the company will be forced to clean up that stretch. But it is unlikely that it will clean up the rest of the river, as it will incur large costs for them, and it is not required by law. This is why the use of property rights is not feasible. This is the main free market solution to this problem, and since it is not very effective, I feel that only government intervention will work. The two main ways in which the government can intervene in order to control negative externalities are Pigouvian taxes and cap-and-trade programs. Pigouvian taxes are the more commonly used form of government control on companies creating negative externalities. They are taxes which focus on activities that cause â€Å"more harm to others. † Taxes can be both producer side and consumer side. An example of a producer side tax is a tax on pollution resulting from production and an example of a consumer side tax is taxtion on highways, which prevent congestion. These taxes are a burden on society, but they are offset by the â€Å"the reductions they cause in costly side effects of everyday activities. † These taxes would also generate high levels of revenue, thus making up for the deficit in public earnings. Since Pigouvian taxes are constant, they would provide a continuing incentive to innovate in methods to reduce pollution resulting from production. The other major alternative is a cap-and-trade program. A cap-and-trade program involves putting a cap on the total amount of pollution, which is deemed â€Å"acceptable,† and issues a number of permits which enforce that level to companies. Firms that pollute less than their permit allows them to, can sell off the excess permits to other companies. This method creates financial incentives for companies to come up with strategies to reduce pollution, as they can gain by selling off excess pollution allowances and lower payments for intial pollution allowances. The market based side of this allows efficient allocation of permits. If a company can reduce pollution at a low cost, then it can sell its excess permits to companies that cannot do so. Thus, it results in an overall reduction of pollution, but at a lower cost. Also, the government obtains revenue from the initial auction of the permits and by taxing the increased profits of the firms that can sell off their excess permits. There is an interesting side effect of the cap-and-trade program in the USA. A number of environmental groups have gone about buying excess permits, thus driving up the demand for permits, and thus, the price for permits. This makes it more costly for firms to pollute, which serves the government’s goal of reducing pollution. However, there are some major disadvantages with both these methods that we need to contend with. The major disadvantage of the cap and trade program is the fact that it gives producers the idea of an â€Å"acceptable† level of pollution. It also may mislead society into believing that there is a reduction in pollution, when it is only a reduction in per unit levels of production. There is also a chance of the bigger corporations buying up a majority of the permits, this perpetuating the pollution that the introduction of permits is trying to reduce. Taxes also have their own set of disadvantages. They can have a regressive effect on societal income, wherein low income groups have to pay the tax eventually, leading to issues of equity. It will lead to an increases in price of goods that are being sold. It also raises the question of exactly how much to tax. However, in spite of these shortcomings, government intervention is still the most effective method of controlling externalities. I feel that it is necessary for governments to intervene in order to control negative externalities. The free market simply does not provide enough feasible options. The ‘polluter pays’ principle, in my opinion, is the way to go, and companies should be taxed or forced to solve the negative externalities that result from normal commercial activity. This will provide an incentive for them to try as hard as possible to reduce those externalities to the best of their ability. We must remember, that at the end of the day, it is necessary to control the externalities, as they are slowly destroying the planet. To quote a Native American proverb â€Å"We do not inherit the earth from our ancestors, we borrow it from our children;† and it is for our children that we must ensure that the perpetrators must pay for their transgressions. Word Count: 1510 WORKS CITED 1. Brown, N. Cristian. Scaling Down Corporate Persons. The Daily Kos (2009). Print. 2. Callahan, Gene. What Is an Externality? The Free Market (2001). Print. 3. Frank, Robert. How to Run up a Deficit, Without Fear. New York Times 6 Dec. 2009. Print. 4. IncidentNews: Amoco Cadiz. IncidentNews: Welcome to IncidentNews! Web. 22 Mar. 2010. http://www. incidentnews. gov/incident/6241 5. Lee, Susan. How Much Is the Right to Pollute Worth? Wall Street Journal (2001). Print. 6. Freeman, Edward R. â€Å"Managing for Stakeholders. † Business and its Publics: Inquiry and Discourse. Boston: Pearson Learning Solutions, 2008. Print. 7. McGee, Matt. Economics: In Terms of the Good, the Bad and the Economist. Victoria: IBID, 2005. Print. 8. Environment Quotes, Green Sayings, Ecology, Conservation, Pollution, Etc. The Quote Garden Quotes, Sayings, Quotations, Verses. Web. 28 Mar. 2010. http://www. quotegarden. com/environment. html.