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A Theory of Impact Bonds as an Alternative to Pigouvian Tax and Public Provision: Application for Climate Change

Instead of addressing externalities with taxes or subsidies, this paper proposes a process in which the government estimates the overall cost of an externality and then offers a lesser amount to the private enterprise that resolves the externality. This paper offers a theoretical framework for resolving externalities, applies this as a theory of social impact bonds, and uses private industry solutions to climate change as an example of how this process would work. Government could therefore identify the social price of public problems, offer a lesser amount to fix them, and then allow investors to organize markets around potential solutions.