For electric utilities, burning high-sulfur coal appears much cheaper than it really is because they usually do not bear the costs of the damage to nearby forests and the income losses of the forest products industry. When the affluent in food-scarce developing countries convert cropland into golf courses, it raises food prices, increasing malnutrition among the poor. But Americans can ignore the costs they impose on others when they get behind the wheel, leading them to drive to the point where the costs to society outweigh the benefits. This dangerous market defect can be remedied by adopting environmental taxes that force markets to reflect more clearly the true costs of products or services. When the market tells the truth, providing the proper price signals to consumers and investors, it can better allocate resources.
Tax policy becomes a means of steering the market in an environmentally sustainable direction.
Environmental taxes also give companies and consumers the freedom to decide how and how much to reduce their pollution or resource use. Generally, those for whom cleaning up is cheapest will do more of it. And, because companies pass their tax bills on to their customers through higher prices, they encourage consumers to switch to less pollution-intensive products. By putting a premium on more efficient resource use and less polluting processes, environmental taxes also stimulate the development of technologies that foster resource conservation and pollution reduction in the long run. In effect, taxes seek the path of least economic resistance to protecting the environment.