Why pollution is more of an economic problem?
Answer:
Everything can be seen in terms of economics.
An easy answer to your problem is to see pollution as an externality. Pollution creates an obvious negative effect on social wellfare - which can be measured on a monetary level. However, producers in general are only concerned on maximizing profits which occurs when MR=MC (marginal revenue, marginal cost). However, for society as a whole, the situation is best when MSB=MSC (marginal social benefit, marginal social cost).
In a typical free market, without externalities these occur at the same point because:
MSB = the demand price of an additional unit sold
MR = Demand Price as in a competative market, no company would have power over sale price
MSC = MC as the only cost is that of producing the product.
However - when intorducing pollution, we can assume that a level of social harm is done per say... each unit made. Ie, in making another car, Company A releases noxious fumes which lead to health and environmental problems that cause everyone to be $X worse off.
We then see that:
MSC = MC + X.
thus there is a need for the externality to be internalized, so that the decision of what amount to produce is back in line with socially optimal conditions. An inefficient solution to this is to charge $X per unit produced - however, this only encourages the company to produce less. It does not encourage the company to lower pollution directly (by say switching to a more environmental production method).
the ideal solution is to charge the company a fee per amount polluted. Now - it could be more profitable for the company to shift towards more environmental production means, rather than paying for a maximal level of pollution damages.
Now:
MC(now) = MC(old) + Y
MSB(now) = MSB(old) + Y ------ as Y is tax revenue which helps the citizens.
And thus, we have obtained the socially optimal solution.
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