Environmentally honest market system

Proponents of ecological economics expound the concept that the Earth's resources are finite, sustainable development is integral to future economic success, and that the real costs of market activity, including the negative impacts on health and the environment, should be reflected in true prices (full cost pricing).

These fumes cause health issues for individuals who live in the plant's vicinity, to the sum of x dollars per ton of copper output.

[5] Whilst the United States has been reluctant to implement environmental taxes on a wide scale, many European companies have shown more enthusiasm towards their use.

This measure has proved one of the most successful green taxes to date, and similar schemes are being considered in the UK, Australia and New York City.

[12] A case which provides compelling evidence for the removal of government subsidies to correct explicit market failure is that of Iran, where the energy industry is heavily subsidised.

[3] A further advantage is that as fuel becomes more expensive, car manufacturers within the country are forced to produce more energy-efficient models to meet market demand.

[13] As the detrimental impact of the careless use of resources becomes clearer and the issue becomes ever more pressing, many governments around the world are moving towards the eradication of subsidies to industries that cause ecological damage.

A 2006 survey by Douglas Koplow, founder of Earth Track, calculated that US federal subsidies to the energy industries total $74 billion.

Throughout his incumbency, President Obama has annually addressed the topic of the abolition of taxpayer subsidies to oil companies, with calls to re-allocate the money to renewable energy sources and alternative fuel technology research instead.

Such projects require a central agency, usually the government, to set a level of emissions that they regard as socially and environmentally acceptable, known as the 'cap'.

As a result, tradable permits reduce pollution by replicating a free market system where monetary gain can act as an incentive, as opposed to rigid, strictly enforced regulatory methods which are the alternative.

A demand curve diagram illustrating the concept of a negative externality.
When externalities are generated, such as the noxious fumes in our example, the full social costs aren't accounted for, meaning the price will be set too low, and the quantity consumed will be greater than the socially optimal level, as at point Qp. A Pigouvian tax is set equal to the value of the externality so that prices rise to reflect the full costs of production, and demand decreases to Qs, demonstrated by the supply curve's shift to the left.