perhaps the most influential ideas have been contributed by economists. They
have advocated the use of techniques which encourage desired behaviour by
financial incentives rather than by legal compulsion.
This approach is
epitomised by the corrective tax: conduct is legally unconstrained but if an
actor chooses to behave in an undesired way, he or she must pay a financial
Although this idea has become prominent as policymakers have been exploring
alternative regulatory forms, it is by no means new. Since the seminal work of
Pigou,8economists have recognised that misallocations arising from negative
externalities (social costs not reflected in the price of the activity) can be corrected
by a tax, ‘internalising’ the cost to the activity. In the 1970s and 1980s, such taxes
were widely discussed as a means of controlling environmental pollution9and, in
one form or another, have since been introduced in several countries.10 While the
application of corrective taxes to the pollution problem has dominated both
theoretical and policy discussion, the device has been, or potentially can be, used to
correct a wide range of other externalities, including congestion11 and the over-
exploitation of scarce natural resources,12 as well as those arising from tobacco,13
alcohol,14 drug addiction,15 work accidents,16 road accidents,17 and defective or
Advocates of corrective tax solutions typically argue that they have several
significant advantages over traditional coercive regulatory instruments:
information and administrative costs; their imposition is more certain; they are more
adept at inducing marginal adjustments to behaviour; they create incentives for
technological development; and they generate funds which can be used to compensate
the victims of externalities. In reviewing regulatory policy, some governments appear
to have been persuaded by the strength of these arguments and have issued statements
6 W.J. Baumol, ‘On Taxation and the Control of Externalities’ (1972) 62 American Economic Review
7 Financial incentives can also operate positively by increasing the benefits, or reducing the costs, of a
8 A.C. Pigou, The Economics of Welfare (London: Macmillan, 4th ed, 1932) Part II, ch 3; A Study in
Public Finance (London: Macmillan, 3rd ed, 1947) Part II, ch 8.
9 W.J. Baumol and W.E. Oates, ‘The Use of Standards and Prices for Protection of the Environment’
(1971) 73 Swedish Journal of Economics 42; Minority Report to the Third Report of the Royal
Commission on Environmental Pollution Cmnd 5054 (1972) paras 2–22.
10 For surveys, see: J. Opschoor and H. Vos, Economic Instruments for Environmental Protection
(Paris: OECD, 1989); S.E. Gaines and R.D. Westin (eds), Taxation for Environmental Protection
(New York: Quorom, 1991).
11 K.J. Button and E.T. Verhoef (eds), Road Pricing, Traffic Congestion and the Environment: Issues
of Efficiency and Social Pricing (Cheltenham: Edward Elgar, 1996).
12 R.E. Rosenman, ‘The Optimal Tax for Maximum Economic Yield: Fishery Regulation under
Rational Expectations’ (1986) 13 Journal of Environmental Economics and Management 348.
13 E.M. Lewit and D. Coate, ‘The Potential for Using Excise Taxes to Reduce Smoking’ (1982) 1
Journal of Health Economics 121.
14 M. Grant, M. Plant and A. Williams (eds), Economics and Alcohol (London: Croom Helm, 1983).
15 C.N. Mitchell, The Drug Solution: Regulating Drugs According to Principles of Justice, Efficiency
and Democracy (Ottawa: Carleton UP 1990).
16 R. Smith, ‘The Feasibility of an ‘‘Injury Tax’’ Approach to Occupational Safety’ (1974) 38 Law and
Contemporary Problems 730.
17 J.O. Jansson, ‘Accident Externality Charges’ (1994) 28 Journal of Transport Economics and Policy
18 R. Dorfman, ‘The Lessons of Pesticide Regulation’ in R. Dorfman (ed), Economic Theory and
Public Decisions: Selected Essays of Robert Dorfman (Cheltenham: Edward Elgar, 1997).
19 eg C.N. Mitchell, ‘Taxation, Retribution and Justice’ (1988) 38 University of Toronto Law Journal
The Modern Law Review [Vol. 61
768 The Modern Law Review Limited 1998