12) Tradeable Pollution Permits

Question 1

What are tradeable pollution permits

Answer 1

-firms buy permits from the government to pollute a certain amount, and can sell excess pollution limits to other firms who have to buy these permits in order to pollute more

Question 2

How do tradeable pollution permits try to stop market failure

Answer 2

-help to limit the market failure arising from negative externalities of production ie pollution

Question 3

Advantages of tradable pollution permits

Answer 3

• long run benefit as it encourages firms to find greener production methods to lower the costs
• the government raise revenue from the permits, which they can use to fund renewable projects etc
• greener firms are incentivised to be even better as they raise revenue from selling excess pollution permits to less green firms

Question 4

Disadvantages of pollution permits

Answer 4

• firms may relocate to areas where they are free to pollute (disincentive effect)
• firms may pass higher costs onto consumers
• creates a barrier to entry, reducing competition
• expensive and difficult to monitor emissions