Environmental market failure

Question 1

what is the tragedy of the commons?

Answer 1

where individuals acting in their self interest overuse a shared resource with the result that it is depleted and degraded.

Question 2

what are pollution permits?

Answer 2

• government organisation that issues pollution permits depending on some factors of the firm
• the permits incentivises firms to underuse them and sell them for supernormal profit and use dynamic efficiency to be more green

Question 3

evaluations with the pollution permit scheme?

Answer 3

• how do you decide how much permit they get
• allocation may be greater than needed
• imperfect information
• regulatory capture
• issuing permits for free reduces the incentive to invest in green energy
• cost to monitor scheme
• impact of international competitiveness

Question 4

why is the supply curve of permits inelastic?

Answer 4

• amount of pollution permits is a fixed number is not dependent on the price
• shifts inwards as permits required decrease every year as more firms sell them off to be more dynamically efficient