Government Intervention in markets - Pollution Permits and State Provision

Question 1

What is a tradeable pollution permit?

Answer 1

legal right to pollute a certain amount per fixed time span.

Question 2

Explain how tradeable pollution permits can tackle negative externalities

Answer 2

The government set the level of pollution allowed
Permits issued to match this level
Firms can invest in green tech or buy more

Question 3

Explain 3 benefits of tradeable pollution permits

Answer 3

The incentive for firms to reduce pollution - Incentive to sell extra permits - make profit

Market-based solution - efficient allocation of permits

Efficient and equitable - options to deal with policy

Question 4

Explain 3 disadvantages of tradable pollution permits

Answer 4

High administration costs to enforce permits

Fines may not be strict enough - If the fine is less than cost of reducing pollution

Needs to be international cooperation - to reduce globally

Question 5

How is state provision funded?

Answer 5

Taxes

Question 6

Explain 2 reasons why the government might want to provide goods

Answer 6

Public goods of a missing market

Merit benefits - social benefits considered

Question 7

Explain 2 benefits of state provision

Answer 7

No price exclusion - free

Resource allocation improved for underproduction of merit goods and missing markets

Question 8

Explain 2 disadvantages of state provision

Answer 8

Opportunity cost

State-run organisations tend to be wasteful - no profit motive leading to inefficiency