24- Tradeable Pollution Permits and Gov Regulation

Question 1

What is a pollution permit?

Answer 1

It is another method to reduce external costs. Permits are issued by governments to firms that allow them to pollute up to a certain limit. Any pollution above this limit is subject to fines. Permits may be traded between firms so firms that are ‘clean’ can sell their surplus permits to firms which are more polluting.

Question 2

Advantages of pollution permits?

Answer 2

• These schemes work through the market mechanism
• They are an incentive for firms to reduce pollution
• The costs of administrating these schemes are low relative to those associated with systems of regulations

Question 3

Disadvantages of pollution permits?

Answer 3

• Pollution will continue, albeit at a lower level than previously
• Large, efficient firms might buy up the permits and continue to pollute
• State provision- government/ politicians will determine the amount of recourses allocated to these public goods without direct reference to the electorate

Question 4

Other ways of providing public goods?

Answer 4

Not via politicians but via agencies appointed by the government (contracting-out) or by charities and voluntary organisations

Question 5

Examples of state publications to inform consumers about goods and services?

Answer 5

• For parents aimed at encouraging them to have their children vaccinated against measles.
• About health risks associated with smoking
• About opportunities for apprenticeships and courses available in higher education.

Question 6

Private costs in relation to energy production using fossil fuels?

Answer 6

• Mining equipment
• Wages for staff
• Health impact on other miners
• Transport costs for shipping coal to power stations

Question 7

External costs in relation to energy production using fossil fuels?

Answer 7

• Climate change- makes some areas inhabitable, more extreme weather, difficulty with growing crops.
• Pollution from power stations can affect health of those who live nearby

Question 8

Private benefits in relation to energy production using fossil fuels?

Answer 8

• Warm homes and nutritious cooked food for those buying energy
• Consistent/predictable energy supply

Question 9

External benefits in relation to energy production using fossil fuels?

Answer 9

• Local multiplier effects

Question 10

How do Pollution permits work?

Answer 10

• Cap and trade system- involves putting a price on carbon and physically limiting the quantity of carbon that can be traded. It forms the basis of the EU’s emission trading scheme.
• The scheme sets a decreasing cap (i.e. maximum limit) for CO2 from energy intensive industries and then allocations and auctions emissions allowance (permits) which can be traded on the market.
• Businesses must buy enough emissions allowances to cover their CO2 emissions- the higher the price , the greater incentive to cut the pollution. Increasing the scarcity of carbon permits, increasing their price.

Question 11

What is a carbon tax?

Answer 11

A tax on the consumption of the production of goods and services, which cause carbon emissions. It is a policy designed to make the polluter pay for the externalities created.

Question 12

Aim of carbon tax?

Answer 12

To increase the private cost of emitting carbon, in theory this will cause output to contract towards the social optimum.

Question 13

Pros of a carbon tax

Answer 13

• Makes polluter pay
• Predictable for businesses
• Tax revenue can be hypothecated to solve pollution issues
• If managed well, will apply to imported goods as well as domestically produced goods.

Question 14

Cons of a carbon tax

Answer 14

• Many be inelastic PED for the goods produced so the tax will have little effect on pollution
• May lead structural unemployment in carbon-related industries
• Could affect competitiveness
• May be regressive

Question 15

Examples of government regulation

Answer 15

• A complete ban on the production of good or provision of a service
• Regulations which place limits on the production process or on the amount of pollution allowed
• Regulations relating to the consumption of a product, e.g. the prohibition of smoking in public areas or the age limit of buying cigarettes.

Question 16

Aim of regulation

Answer 16

To restrict the activity to the required level but without enforcement firms may not meet the legal requirements.

Question 17

Advantages of regulation

Answer 17

• Regulation came limit the extent of an activity

- It might act as an incentive to producers to develop new technologies that avoid the activity

Question 18

Disadvantages of regulation

Answer 18

• The cost of enforcement of laws/regulations e.g. inspectors may have to be employed to ensure that producers and/or consumers abide by the rules
• Problems of determining the socially efficient levels of the production process or activity.

Question 19

What are property rights?

Answer 19

Property rights are the exclusive authority to determine how a resource is used, whether that resource is owned by the government , collective bodies or individuals. In other words, property rights are ownership.

Question 20

How do property rights work?

Answer 20

It involves assigning ownership (property) rights to those who might be affected by external costs. This means that owners are given the right to claim damages against those causing the external costs.

Question 21

Advantages of property rights?

Answer 21

• Property rights act as an incentive for firms to take into account both the private costs and the external costs
• The opportunity to fine firms caught caught polluting and use the money to compensate those damaged
• The administration costs of these schemes are low relative to other forms of regulation

Question 22

Disadvantages of property rights?

Answer 22

• There is the initial problem of assigning property rights
• If a breach of property rights has occurred, there may be an expensive legal procedure to determine how much compensation should be paid to whom
• It may difficult to agree on the monetary value of the external cost