1.4.7 Other forms of government intervention

Question 1

Cap and trade scheme

Answer 1

A pollution control system in which economic benefits are established in an effort to limit the emission of greenhouse gases and other pollutants.

The government sets a limit on the amount of pollution certain regions or businesses can emit.

Question 2

Define tradeable

Answer 2

A good/service can be sold in another location distant from where it was produced.

Question 3

Define permit

Answer 3

To officially allow or authorise someone to do something.

Question 4

What is a tradeable pollution permit?

Answer 4

A permit that gives a business the right to emit a given quantity of waste or pollution into the environment. These can then be traded between businesses.

Question 5

What is the main use of tradeable pollution permits?

Answer 5

They are mainly used in the carbon market, to stop/reduce the output of greenhouse gases.

Question 6

How do tradeable pollution permits work to reduce carbon emissions?

Answer 6

The government sets a limit (cap) on the amount of carbon to be emitted over a period of time (usually a year). The cap acts as a target for carbon emissions and is likely to be lower than current levels of carbon emissions.
The government then allocates permits to emit carbon, the total of which equals the cap. It issues these by giving them to firms which currently emit carbon. These permits are then tradable for money between polluters. Firms which succeed in reducing their carbon emissions below their permit levels can sell their permits to other producers who are exceeding their limits.

The higher the price of the permits, the greater the incentive for carbon-emitting firms to reduce their carbon emissions

Question 7

Advantages of a tradeable pollution permit

Answer 7

• Cheaper to implement than regulation
• Firms are encouraged to reduce emissions as selling excess permits can increase profits.

Question 8

SPICED

Answer 8

Strong Pound = Imports Cheap, Exports Dear

Question 9

Biggest disadvantage of tradeable pollution permits

Answer 9

Companies could move production to countries where they are not penalised for emitting carbon.
- Having tradeable pollution permits might just move carbon emissions from one country to another, not eliminating them entirely.

Question 10

Advantages of Tradeable Pollution Permits

Answer 10

• These schemes are an effective way of reducing pollution to an acceptable level, as they encourage firms to become more efficient and pollute less.
• Firms causing low levels of pollution will benefit from these schemes – they’ll be able to sell permits, allowing them to invest more and expand.
• Governments can use any revenue from fines to invest in other pollution reducing schemes.
• These schemes internalise the externality of pollution.

Question 11

Disadvantages of Tradeable Pollution Permits

Answer 11

• The optimal pollution level can be difficult to set.
• If the level is set too high, firms have no incentive to lower emissions.
• If the level is set too low, new firms might not be able to start up at all or existing firms might choose to relocate to somewhere they’re less restricted (harming a country’s economic growth).
• Setting the optimal pollution level at the wrong level can lead to government failure.
• The pollution permit scheme creates a new market – there might be market failure within this new market.
• High levels of pollution in specific areas may still exist, and this would still be harmful to the environment.
• Administrative costs for governments and firms.

Question 12

Positives of nationalisation

Answer 12

• Governments can ensure a nationalised industry better provides the goods and services needed by the country.
• Governments can set the output and prices of an industry at a level that most benefits society.
• Nationalised industries can be more easily regulated so they act in the best interests of consumers.
• Governments can pay public sector workers a fair wage.
• A nationalised industry will have greater economies of scale than an industry populated by several private firms.
• A nationalised industry can pay suppliers fair prices (which a monopoly is much less likely to do).

Question 13

How do governments promote small business?

Answer 13

Governments may choose to increase competition by promoting smaller businesses. This is likely to involve tax breaks or subsidies for small firms, or helping entrepreneurs get they investment they need to start a new business.

Reducing regulations and ‘red tape’ is a good way to encourage new, smaller businesses to start up.

Increasing competition in this way should lead to greater choice and lower prices for consumers.