1.4.1: Government Intervention In Markets (Tradable Pollution Permits)

Question 1

What are tradable pollution permits?

Answer 1

• They are where governments give firms a permit which allows them to produce up to a set amount of carbon each year

Question 2

What are the advantages of tradable pollution permits?

Answer 2

• It is guaranteed that pollution will fall to the targets set by governments; this will maximise social welfare
• The government can raise revenue by selling permits and by fining firms who exceed their pollution limit
• Encourages firms to use and invest in green technology
• Firms are able to make their own decisions about cutting pollution or buying more permits. This helps efficiency.

Question 3

What are the disadvantages of tradable pollution permits?

Answer 3

• This can be expensive to monitor and police; it will only work if monitored well
• It will raise costs for businesses, and it is likely that these higher costs will be passed onto consumers