Product prices are not currently set at their marginal cost because firms do not have to internalize all of the pollution costs associated with a product or service’s production. One of the primary roles for government is to step in when externalities exist and the coordination costs of resolving them are too great for private actors; one could argue this is the primary justification for any government expansion. Under our current economic system, we are harming the planet without pricing in the costs of repairing it. In other words, the prices we see are imperfect information.
Telling producers to price the costs of their pollution is basically an exercise in price discovery, and the most efficient method for this price discovery should be pursued. As I understand it, this is cap and trade. Let me rephrase this: introducing cap and trade will make the market work better. Cap and trade is the closest to a free market answer to a free market failure that exists; if private actors could have coordinated this action amongst themselves, they already would have. The lack of a market mechanism is the demonstration of the market’s failure. In a sense, it is like revealed preference, a favorite phrase of economists that means we demonstrate our beliefs by our actions; just as we show how much we want something by giving it a price, the free market’s failure to solve the obvious problem demonstrates its inability to do so.
The market needs the government to make it “free.”
(For a Republican in Congress to be against cap-and-trade demonstrates that they are against Democrats. Their ideology becomes one of oppositionism detached from considerations of pragamatism. In this case, their ideological slavishness to the free market is suffocated by their ideological opposition to anything from the Left.)
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