One critical Reader of yesterday’s Post (don’t you just hate those people) asked: What in the hell does exterior financing relate to Pigovian taxation, and how could it possibly be a replacement for such taxation?
Corporate leadership loves immediate Profits and rapid Investment schedules, rightfully expecting this affects immediate Corporate Salaries and Bonuses of all types. Financial institution leadership finds appeal in sound loan extension and uninterrupted Repayment schedules, rightfully thinking this has immediate bearing on financial institution Salaries and Bonuses of all types. Corporate leadership wants to get Profits and Investment schedules on the Books as fast as possible, and often do not invest the Investigative time in research of all problems concerned in an Investment capitalization. Financial institution leadership, on the other hand, carefully studies the Prospectus for an Investment capitalization, reviews all potential problems which might appear in both construction, and in later Production from the constructed facility. They will also reread all legal complications which could potentially apply to the Investment construction.
Financial leadership does several additional things: they examine what materials will be used in both the construction and later production, they examine the potential market for the produced Product along with the spread of volume of Product sold at various Prices, and they evaluate what additional Costs might reveal themselves during the course of Construction or later Production. Financial institutions do this to establish the minima and maxima of Prices and Product volume salable with which to pay all Costs plus Debt service of the loan. Bankers can get quite finicky about such things.
Here is where exterior financing replaces the need for Pigovian taxes. Financial institutions assure sufficient Profitability in the planned Production so as to supply Debt service. Risky or hazardous production (whether Pollution because of production or usage of the final Product) will require higher Profitability of Production (guaranteed by a higher Interest rate charge) or by refusal of loan extension. This added Interest and heavier resistence to loan extension serves far better than Pigovian taxation in impact, and requires no regulatory power or determination. lgl
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