Solutions To Negative Externalities

Question 1

Solving market failure - MIC

Answer 1

Markets
- Taxes
- Pollution permit trading
- Price controls/ minimum and maximum prices

Information
- Persuading people there is an issue

Control
- Assigning property rights (necessary for pollution permit trading)
- Regulation

Question 2

Market solution: Internalising the production externality

Answer 2

Question 3

Advantages/ Disadvantages of pollution taxes

Answer 3

Question 4

Evaluation: Problems with Environmental Taxes

Answer 4

Question 5

Reducing Externalities - The use of pollution taxes

Answer 5

Question 6

Pollution permits

Answer 6

Pollution permits involve giving firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year.

If the firm produces less pollution (due to the costs of reducing its CO2 output being low) it can sell its pollution permits to other firms

However, if a firm produces more pollution (than the set government set amount) it has to buy permits form other firms or the government.

This creates a market for pollution permits with the price set by demand and price

Question 7

Pollution permit aims

Answer 7

The aim of pollution permits is to provide market incentives for firms to reduce pollution and reduce the external costs associated with it (third party effects). For example, it is argued that carbon dioxide emissions contribute towards global warming, as a result this can lead to higher sea levels, which can lead to an increased risk of flooding, meaning that households and the government have to increase expenditure on flood defences.

Pollution permits can also be a way for the government to raise revenue, by selling firms these permits to allow pollution

Question 8

Pollution permits diagram

Answer 8

Question 9

Pollution permits overtime diagram

Answer 9