The Polluter Pays Principle

The polluter pays principle (PPP) is a basic economic idea that firms or consumers should pay for the cost of the negative externality they create. The polluter pays principle usually refers to environmental costs, but it could be extended to any external cost. 

The Polluter Pays Principle
The Polluter Pays Principle

In a purely free market, you would only face your private costs. However, for goods with negative externalities, there are additional external costs, e.g. damage to the environment. This means the social cost of some goods are greater than the private cost. 

The polluter pays principle is simply the idea that we should pay the total social cost including the environmental costs. This requires some authority or government agency to calculate our external costs and make sure that we pay the full social cost. A simple example, is a tax on petrol. When consuming petrol, we create pollution. The tax means the price we pay more closely reflects the social cost. 

The polluter pays principle is a way of ‘internalizing the externality’. It makes the firm / consumer pay the total social cost, rather than just the private cost. (Social cost = private cost+ external cost) 

The polluter pays principle is an important basis of international law. In 1972, the OECD (Organisation for Economic Co-operation and Development) wrote Guiding Principles concerning International Economic Aspects of Environmental Policies, stating: 

“The polluter should bear the expenses of carrying out the above-mentioned measures decided by public authorities to ensure that the environment is in an acceptable state.” 

The polluter pays principle was incorporated into the 1992 Rio summit the declaration stated: 

 “National authorities should endeavor to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.” 

Difficulties of implementing polluter pays principle 

• It can be difficult to measure how much pollution is produced, e.g. firms may try to hide the extent of their pollution. 

• It can be difficult to impose regulations or tax on firms from other countries. For example, when we contribute to global warming, the problem effects everyone around the world, but it can be difficult to create international agreements to impose penalties on those polluting. 

• Pollution havens. These are countries which have weaker environmental legislation and firms can escape taxes and regulations on pollution by shifting production to those countries. 

• Some costs are unexpected and occur after the event. e.g. in building nuclear power plant. • Administration costs of collecting information and implementing tax. For example, a few drunks late at night may make a lot of noise and disturb the neighbourhood, but it would be impractical to impose a tax on those who make noise after a hard-days night. Administration costs have prevented the extension of congestion charge to smaller cities like Manchester – even though in principle it would make economic sense to have a charge for those who cause the external cost of congestion. 

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