Impact of Eco-taxes on Supply Side Behavior

One of the central goals of community would be to make prices reflect true costs. At present, prices place an artificially low value on non-renewable natural resources and completely ignore external costs – to the air, the water, and the soil and to future generations, as it is common good and theoretically do not belong to anyone. Therefore government interference is needed to adjust prices to include real costs and institute a system of ‘green taxes’ to drive this process forward. The eco tax achieves outcome by simply pricing the environmental damage in the same way other production inputs are priced thus inducing efficient use of this input1.
Taxes enacted to correct the effects of negative externalities towards environment are called pigovian taxes. Economists usually prefer pigovian taxes over laws or regulations as a way to deal with pollution and other damage to environment, because they can reduce pollution at a lower cost to society. Pigovian taxes correct incentives for the presence of externalities and thereby move the allocation of resources closer to the social optimum, thus they taxes raise revenue for the government programs and enhance economic efficiency2.
There are protests, that environmental damage cannot be evaluated in terms of money and any actions harming environment should be simply prohibited, but making decisions, which satisfies majority of the society always requires trading off one goal against another. Clean air and clean water have their value and it must be compared to their opportunity cost - what must be given up to obtain them. Eliminating all pollution is impossible, trying to eliminate all pollution would reverse many of the technological advances that allow us to enjoy the high standard of living and few people would be willing to accept poor nutrition, inadequate medical care or shoddy housing to make the environment as clean as possible3. Environment obeys the law of demand, the lower the price of environmental protection, the more public will want it. The economic approach of taxes reduces the costs of environmental protection and therefore increases public’s demand for a clean environment.4…