The basic premise of capitalism is that the price of a good or service reflects basic market forces — supply & demand. But what if the price doesn’t accurately measure the true cost? If the government subsidizes me to buy a pencil, then I’ll buy more pencils, and for some reason, the government has decided it is a worthwhile use of tax revenue.
However, what about subsidies that aren’t written into law? These are called externalities , and they’re the crux of pretty much every problem in the world that has been caused by capitalism. The cost of pollution, including climate changing pollution, is not included in the cost of the products and services we buy. That cost is instead externalized onto society, who has to deal with its consequences.
The second is carbon trading. It’s a little more complicated, but essentially an Emissions Trading System establishes a market for one company to buy a carbon emission chunk from another company that is not using it anymore because they’ve become more efficient. Again, higher cost for the polluter, lower cost for the nonpolluter.
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