LS21, LS22 - Tradeable Pollution Permits And Regulation

Question 1

How do TPPs work

Answer 1

Limit set in total pollution firms allowed to emit over a period
Gov allocated pollution permits to firms, allowing firms to pollute up to set limit
Permits can be traded
Gov monitors emissions, if firms pollute below limit they can sell them. If firms pollute above limit they’ll be fined or have to buy more permits

Question 2

Emission trading scheme advantages

Answer 2

Market created for buying and selling permits - price mechanism internalises external costs of carbon emissions
Incentive given to invest in pollution reducing technology
Cleaner firms rewarded, less friendly firms punished
Unused permits can be sold for money

Question 3

Emission trading schemes disadvantages

Answer 3

Information gap could mean too many permits issued meaning no incentive to reduce pollution or too few permits issued, reduced international competitiveness and growth
Producers may pass added costs to consumers
Price may be volatile - uncertainty for businesses
Permits given away are missed opportunities to raise gov revenue
Cost of operating
Competitor firms in other countries not subject to ETS, improves their relative competitiveness

Question 4

Regulation

Answer 4

Rule or law enacted by government that must be followed by economic agents
Used to encourage change in behaviour

Question 5

Command (regulation)

Answer 5

Bans
Limits
Caps
Compulsory actions (health warning on cigs)

Question 6

Control (regulation)

Answer 6

Enforcement
Punishment

Question 7

How regulation aims to correct market failure

Answer 7

Provides incentive to change behaviour toward socially optimal level of output
If correctly implement leads to removal of welfare loss

Question 8

Disadvantages of regulation

Answer 8

Costly - administration and enforcement
Setting right level of regulation is difficult
May encourage black market activity
Unintended consequences may arise