The negative impacts, or “externalities,” of pollution affect businesses and individuals alike. They both share the responsibility of sustainability, but regulating businesses’ accountability can be difficult. The role of the government is to balance social and environmental well-being while not stifling economic growth to achieve a socially optimal outcome. There are many different approaches governments can take, each with their own economic pros and cons. 

Current U.S. Strategy  

Putting the responsibility of sustainability on the business is referred to as “internalizing the externality.” Some of the ways the U.S. government goes about this can be categorized as either fixing the price, fixing the quantity, or laws and regulations. 

“Fixing the price” means the government intervenes to artificially raise or lower the “market price” of goods or services. One method is a corrective tax, which makes certain activities with higher environmental impact more expensive. From an economic standpoint, increasing the price to the company of that activity means they would do less of it to avoid losing money. However, this could also lead to market shortages because they produce fewer goods than the market demands. Additionally, this means large companies with greater financial resources will continue to pollute, whereas small companies may go out of business because they can’t afford to produce. 

That’s where the subsidy method comes in. This way, the government provides tax cuts, grants, and other financial resources to decrease the cost of business practices that help the environment, like using renewable energy or using eco-friendly vehicles. From an economic perspective, this means businesses will do more of the activity because they can increase quantity without paying more. However, this means businesses rely on government support, which can de-incentivize innovation and be more costly for the government. 

“Fixing the quantity” involves limiting the amount of negative impact or impactful activities. A common method for this is cap and trade used for carbon emissions, which places a cap on the emissions allowed for a company using permits. This sets a hard limit on overall emissions allowed for all business combined, allowing the government to set reduction goals. These permits can be bought, sold, and traded depending on the company’s needs, creating a market for them. This market encourages businesses to find cost-effective ways to reduce emissions if they can’t afford to buy more permits. However, this method also carries the potential for permit market manipulation through fraud, like selling fake permits.  

Lastly, there’s the laws and regulations approach. In the US, this includes legislation requiring emission reporting, sustainability disclosure, financial accountability for environmental impacts, and various others depending on the state. However, strict rules can be a “blunt instrument” to fix the problems, sometimes weakening market forces because of the additional cost to businesses from compliance and reporting, and the potential for businesses to simply pass on price increases to consumers.  

Why It Matters 

Government regulation encouraging environmentally responsible business practices is becoming more important with intensifying global climate challenges. By making businesses internalize the externalities, the government incentivizes them to innovate, thus driving technology forward for everyone. The increased transparency requirements allow investors and consumers to make informed decisions about where they put their money, in turn incentivizing responsible practices to appease stakeholders. Businesses’ climate actions are important outside of their economic impact; the externalities of these actions affect all of us. 

Key Terms 

Externality: when producing or consuming a good causes a positive or negative impact on third parties not involved in the transaction. 

Market price: the current price at which a good or service can be bought or sold determined  by supply and demand. 

Shortage: when then quantity demanded of a good or service is greater than the quantity supplied at the market price. 

Cap and trade: a government regulatory program to limit the level of emissions from industrial activity.  

Sources 

The Role of Government Regulation in Promoting Corporate Social Responsibility and Sustainable Development 

Cap and Trade: How It Works, Benefits, and Examples – SuperMoney 

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Since 1966, Placon has been a leading designer and manufacturer of innovative and sustainable plastic packaging for medical, food, and consumer goods markets. Placon has manufacturing operations in Madison, WI; West Springfield, MA; Elkhart, IN; and Plymouth, MN, and is currently ranked in the Top 20 in Plastics News 2024 Thermoformers Rankings. Placon delivers packaging breakthroughs that inspire better engagement between people and products.