Tradable pollution permits 1.4.1

Question 1

Is tradable pollution permits have a negative externality?

Answer 1

yes

Question 2

why is taxation and regulation ineffective?

Answer 2

They are deemed to be ineffective at solving pollution.

Question 3

How do these pollution permits work?

Answer 3

1. The government decides on a level of pollution allowed in the entire economy.
2. permits are issued to match this level.
3. now firms will decide whether they should reduce their pollution levels down to what the gov introduced or buy the permits and sell it to other firms.
   - they could re-invest into greener tech
4. if the firm breaks the pollution permit then they will be fined.

Question 4

Give an example of how these firms work when pollution permits are introduced?

Answer 4

Firm x and y- x and y produces 20 units of pollution.
firm x and y- produces at 18 units of pollution
now that the firm has introduced pollution permits
-x will produce 16 units and can invest it into green tech so they have 2 spare permits
-y will produce at 18 units, this could be because they don’t have enough money to invest so it’s better to buy it- they need 2 permits.

Question 5

what is the reason why some firms decide to buy it or invest it?

Answer 5

it depends on the firm and whatever will cost them less money, they will pick that option.

Question 6

how would the diagram look for a pollution permit

Answer 6

for the x-axis label it as quantity
for the y-axis label it as price
-draw a demand curve pointing downwards
-draw a supply curve pointing upwards as s1

remember it’s important to mention

1. cost of production will rise
2. the supply curve will shift to the left
3. there will be reduction in quantity
   - thus improving the allocation of resources.

Question 7

what are the advantages of a pollution permit?

Answer 7

There’s a greater incentive for pollution permits to be reduced since firms can use these excess pollution permits they have and can sell them for profits.

• they can reduce the level of pollution to reach the socially optimum level this will only happen when q1=q star meaning that welfare is maximized and allocative efficiency will be reached.
• market-based solution does not involve government meddling
• efficient and equitable for firms- so it doesn’t hinder firms too much they have options.

Question 8

what are the disadvantages of pollution permits?

Answer 8

• Deciding the level of pollution allowed
• there’s high admin costs and difficult to enforce so ensuring firms are not getting away from producing too much
• fines may not be strict enough
• geographical distribution-quota protocol-e.g pollution was heavily concentrated in the USA because firms kept buying it
• the need for international cooperation-everyone needs to do it if it’s considered a global market failure.

Question 9

Evaluation

Answer 9

1. level of info
2. number of firms who are able to reduce pollution
   - not enough permits are allocated
   - find it difficult to reduce pollution
   - firms may find it costly
   - as a result, not enough permits sold
   - lead to gov failure