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.
For instance, a family of five would consume on average $1,000 worth of energy nationally. With a $0.25 tax in place they would receive a $250 reimbursement at the end of the year. This would then counterbalance the financial burden on working families for necessary consumption while still fulfilling the intent of externality regulation - the reduction of frivolous and wasteful consumption through reallocation of resources.
Throughout the year, the government would invest the revenue generated by the tax.
After the initial year, the earnings from the investment could be put toward researching alternative energy sources or lowering the national debt, which would also stimulate private investment by lowering the interest rate.
This facet of the policy would also work to catalyze the entire economy as more efficient technology would increase productivity, ultimately leading to higher output and a higher standard of living - not including the benefits of a healthy environment.
Many advocate public transportation and alternative means for workers' commutes, but all too often, this is simply impossible. As someone who grew up having to drive 20 minutes to get into town, I can attest to the limitations of public transit.
For Crozet, Va., to build a rail system would be economically insane. Driving to work this summer, 17 miles from my house, the gas adds up.
I drive a small car and usually follow the speed limit, but the arrow still approaches the "E." It can be very discouraging to have to use a quarter of your paycheck just to get to work the next week.
If the true goal of cap and trade is to secure the blessings of nature for our children, then it needs to be done with purpose and fairness, both of which will allow the policy to work more efficiently.
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.
This may not be a perfect model, and there is certainly a ways to go in the engineering of alternative energy systems.
However, at schools and research institutions across the world and here at Virginia Tech there are many brilliant people working to fix those problems.
If we can operate outside of the mutually exclusive, left-or-right school of thought, there is boundless potential for reducing negative externalities. The important facet of the policy is accomplishing these things without doing irreparable damage to the middle class.