Micro part 13- Environment

Question 1

What is the function of environment

Answer 1

1. It is a provider of resources which are then used to produce other goods
2. It is a provider of amenities (something useful/desirable) e.g. a clean env. can lead to an increase in s of l
3. Act as an absorber of waste when production/consumption processes generate waste
4. These can impact upon each other e.g. food production processes can harm the natural landscape (loss of amenity) whilst it is accompanied by fertilisers which must be absorbed by the env.

Question 2

Describe market failure in respect to environment

Answer 2

1. See diagrams on externalities as to why market failure is caused
2. Negative externalities in production is when MSC > MPC- industry releases CO2
3. Negative externalities in consumption is when MSB < MPB -vehicles release fumes

Question 3

What does Kuznets curve show

Answer 3

1. shows relationship between economic development and env. degradation.
2. As incomes per capita rise then so does env. degradation up until a turning point where it starts to fall

Question 4

What happens as economy develops to environment

Answer 4

As economy develops then production and consumption increase due to increased incomes.

2. This increases the use of natural resources as a secondary sector grows.
3. More industry creates negative ext. in production e.g. pollution

Question 5

What happens to the environment as the secondary sector grows

Answer 5

1. Growth of secondary sector means more mechanisation of the primary so there is more industrial processes which increases env. degradation. 2. As incomes have risen there is greater demand for energy

Question 6

What happens to the environment as the tertiary sector grows

Answer 6

1. As development continues the tertiary sector becomes larger.
2. Tertiary sector has less impact on env. as they require less natural resources and less pollution.
3. The country may also begin importing pollutive secondary sector goods meaning that the secondary sector begins to decline so pollution is reduced even more

Question 7

What happens to the environment as incomes and wealth increase

Answer 7

1. As incomes and wealth increase, inhabitants demand a cleaner env. to increase their s of l.
2. Tech has gotten better due to increased investment from the rising incomes so greener tech is possible.
3. The gov. may pass env. legislation

Question 8

Define sustainable development

Answer 8

1. Sustainable development – growth that does not lead to a fall in the productive potential for future generations

Question 9

Describe how economic growth affects the environment differently in developed and developing countries

Answer 9

1. In developed countries growth is less likely to harm the env. since there will be greater spending on green tech (consumers demand this) and legislation by the gov.
2. Developing countries will harm the environment- to do with kuznets curve
3. High/fast levels of economic growth could mean natural resources depleted quicker than can be replaced

Question 10

Polices to reduce environmental market failure

Answer 10

1. Indirect taxation
2. Subsidies
3. Regulation
4. Pollution permits
5. Information provision
6. Gov. expenditure
7. Private/public partnerships

Question 11

Describe how indirect taxation can be used to reduce environmental market failure

Answer 11

1. aim to increase price so demand falls. This occurs when PED is elastic
2. aim to increase revenue when PED is inelastic. This can be used for investment into greener tech
3. gov. will assess the cost to society of pollution. Sets a tax rate so that the tax is equal to the value of the externality.
4. This means CoP increases as they internalise the externality, firms reduce output as profits are lower and thus emissions are reduced

Question 12

What are advantages and problems of indirect taxation

Answer 12

1. advantage is that it allows the market mechanism to allocate resources since pollution is now a CoP
2. yet it can be difficult to put a monetary value on pollution so can’t decide the optimal tax rate and has little impact on reducing consumption when PED is inelastic

Question 13

Describe how subsidies can be used to reduce environmental market failure

Answer 13

1. encourage consumption of a merit good e.g. recycling schemes
2. more effective when PED > 1 at increasing the consumption
3. but if PED is inelastic then firms may internalise the subsidy

Question 14

Describe how regulation can be used to reduce environmental market failure

Answer 14

1. laying down maximum pollution levels
2. means that pollution levels are actually reduced rather than relying on market based approaches
3. only results in efficient allocation of resources if the gov. equates the MSC with the MSB

Question 15

What are the problems of regulation to reduce environmental market failure

Answer 15

1. can raise costs for firms who may then pass this onto consumers as higher prices
2. doesn’t say how these pollution levels can be achieved e.g. the tech may not be there for it to be physically possible and may result in underprovision of a good if firms need to cut output in order to meet demand.
3. Whilst this may reduce pollution is can create excess demand even if the good is not particularly damaging to env.

Question 16

Describe how pollution permits can be used to reduce environmental market failure

Answer 16

1. these will be tradeable
2. each cap has a value of carbon that can be released, give them to firms who can then sell them to other firms that need them
3. the higher the price of the permit then the higher the incentive to reduce pollution.
4. This means the externality is internalised as firms must pay to pollute.

Question 17

Describe advantages of pollution permits to reduce environmental market failure

Answer 17

1. The externality is internalised as firms must pay to pollute.
2. This can increase their CoP and drive out of the market firms that are env. unfriendly (may reduce supply so underprovision).
3. also offers chance to increase profit if can reduce carbon emissions significantly. #
4. This is more beneficial when these green firms are the ones receiving the revenue, meaning more investment can go into green tech.
5. This benefits env. in the l.r. since production methods will change

Question 18

Describe disadvantages of pollution permits to reduce environmental market failure

Answer 18

1. disadvantage is that it is hard to estimate how many permits to give out.
2. Too many and pollution may not be reduced enough since there is excess supply which can drive down the market price of them potentially making it significantly cheaper to buy permits than actually invest in tech that reduces pollution
3. could also restrict contestability in the market since the permits may act as a barrier to entry

Question 19

Describe how Information provision can be used to reduce environmental market failure

Answer 19

1. ensure there is no info failure so the costs and benefits are fully understood
2. means polluting goods won’t be overprovided as consumers now realise their costs

Question 20

Describe how Gov. expenditure can be used to reduce environmental market failure

Answer 20

1. spend directly on schemes e.g. litter removal
2. works better when the schemes are reoccurring e.g. a continuous recycling programme is better than a one-off litter clean-up

Question 21

Describe how Private/public partnerships can be used to reduce environmental market failure

Answer 21

1. when there is collaboration then more sustainable production
2. gov. providing investment to firms to engage in research into green tech