In the 20th century, English economist A.C. Pigou developed a provocative concept that would change economic thinking and the world. This new idea, inspired by his Cambridge colleague and mentor Alfred Marshall, was the theory of externalities. In his book, "Wealth and Welfare," he advocated considering private and societal costs in economic analysis.
These costs, or externalities, are byproducts of production that have no direct cost inherited by either the producer or the consumer, but instead are paid for by society as a whole.
Externalities can benefit society, as in the case of positive externalities, or hurt it, as with negative externalities.
Education, for example, has positive externalities: All people in society benefit from the increased productivity that comes with better education.
Pollution from production, on the other hand, hurts the ecosystem, ruins lakes and rivers, lowers the quality of life (just ask people living in cities where the night sky is concealed by layers of smog) and is a negative externality.
Over the course of the century, economists have largely accepted Pigou's theory. What has not been accepted is the means of correcting these problems.
Not surprisingly, Democrats support cap and trade, citing damages to the environment. Republicans fear that taxes on necessary goods, such as gas, pose a greater threat to the middle class, with many everyday Americans spending more and more of their incomes on simply getting to work.
Democrats should sympathize with this argument as the party is vehemently against regressive taxes, or taxes that take a higher percentage of poor and middle class workers' incomes than the wealthy, which the system would produce.
As with many controversial issues, both concerns are legitimate problems. Sacrifices must be made, that is always true, but perhaps they needn't be as excessive as either party's plan would force. The following is, hopefully, a bilateral solution that could save Americans money without compromising environmental responsibility.
Assume that people spend based on a short-term, cash-in-hand basis. If this is the case, the continued system of the cap and trade solution to externalities, or taxing the product to reduce frivolous and excessive spending, can be a workable solution. First, include a non-income-based tax credit to be given back to consumers yearly.
Given the previous assumption, this will not change the effectiveness of cap and trade on reducing excess consumption.
Also, this will allow for working class families to remain unharmed from what is currently a regressive tax system.
This tax credit would reimburse consumers for the additional use of energy in proportion to the normal consumption per family size.
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"To do so, cap and trade must be carefully constructed to not penalize people trying to get to work every day, but to reward efficiency and deter wasteful self-indulgent consumption by the top 5 percent of income earners." Over-consumptive, self-indulgent behavior is by no means limited to the top 5 percent of income earners. How many middle-class people signed onto loans that both they and the banks knew were dangerous, but did so anyway so that they could have their 3,000+ square foot home in the countryside? How many middle class people have tens of thousands of dollars in credit card debt (excluding medical bills)? Americans in general want to live large and have someone else pay for it, so don't act like wasteful consumption is limited to the top 5 (or even 50) percent of wage-earners.
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