<i>&gt; A plastic bag tax shifts the externality and fixes the market failure.</i><p>Only if you assume that the entity being taxed (in this case the consumer) is the one that can fix the problem at the lowest cost, and that the amount of the tax is the efficient amount, i.e., that it changes the consumer&#x27;s incentives in exactly the right way to maximize the net gain to society as a whole.<p>I&#x27;m actually skeptical that either of these things are true even in this simple case (let alone in the many more complicated cases in which the same argument for taxes to &quot;fix&quot; market failures is made). I would guess that most people dispose of plastic grocery bags by throwing them in the trash. (In some places they may be recyclable, if so just substitute the recycler for the trash collector in what follows.) So the entity that probably knows the most about the costs of disposing of them is the trash collector. That is probably also the entity that can fix the externality at the lowest cost. So if we thought there was an uncaptured externality involved, it would make more sense to tax the trash collector based on the impact of the plastic bags as he disposes of them, and let him pass on the cost to the consumer in higher trash collection fees if necessary. And a tax of 5 cents per plastic bag seems too high for this method of taxation: in fact I&#x27;d be surprised of 1 cent per bag wasn&#x27;t too high.