Protecting the Environment Flashcards
How do Subsidies work?
Grants given to firms to lower COP –> Given to firms producing green alternatives
Fall in COP –> Increase in S –> Fall in P of Alternatives –> Less demand for polluting substitute good –> Reduction in Pollution
Limitations of Subsidies?
Firms can use substitutes as an increase in profit rather for investment
Polluting goods may be price inelastic
Opp Cost
How do Pollution Permits work?
Govt distributes permits to firms, allowing them to pollute a fixed amount.
Limits the total amount of pollution in the economy
Firms can sell permits if they reduce their pollution below their limit, firms that need to pollute more must buy permits.
Creates a profit incentive for firms to reduce pollution in order to make revenue by selling supply permits.
Each year, government will reduce the total amount of permits given out
How do Fines and Regulations work?
Sets rules which firms must follow on the consumption of polluting products or production techniques.
If firms break the regulations, the government will fine them.
Creates an incentive to change behaviour and cut pollutive products (because of an increase in cost of polluting)
Problems with Pollution Permits?
If firms are given too many pollution permits then they do not have to worry about decreasing pollution and can get withdrawal profit
Hard to enforce
The profits from selling P.P. could be less than money spent on developing green solutions (Firms won’t invest)
Problems with Fines and Regulations?
If fines are less than the benefits for polluting, firms will still pollute
Regulation will increase the costs for firms (polluting or not) –> inflation and a fall in export competitiveness
Difficult to enforce –> Cost a lot to the government
How do Indirect Taxes work?
Indirect Taxes –> Increase COP
Fall in Profit Margins –> Firms have less incentive to sell these goods
Fall in Supply
In SR, Leads to excess demand
In LR, leads to a contraction in demand as price rises
With reduction in the use of polluting goods –> fall in pollution
Limitations of Indirect Taxes?
Depends if alternatives are available, if no alternatives consumers just pay higher prices
Increase in Prices –> Inflation –> fall in DI
Indirect Taxes are Regressive
