Tradable Pollution Permits (L21)

Question 1

How is a limit/cap set?

Answer 1

Using the total amount of pollution firms are allowed to emit over a period

Question 2

Who allocates pollution permits

Answer 2

Ty government

Question 3

What does the permit allow

Answer 3

Firms to pollute up to the limit set. They can be traded (tradable pollution permits)

Question 4

How does the government monitor the emissions of firms?

Answer 4

If firms pollute below the levels set, permits aren’t used so they can be sold. If a firm breaks the pollution limit, they will face fines unless they purchase pollution permits.

Question 5

Advantages of max prices

Answer 5

Prices are lowered for consumers

Firms with a lot of monopoly power benefit

Question 6

Advantages of minimum prices

Answer 6

In agricultural markets, food stability increases and producer incomes are protected
Can reduce consumption of demerit goods (alcohol)

Question 7

Evaluate reduction of consumption of demerit goods as an advantage of minimum prices

Answer 7

It depends on PED. If it’s inelastic, demand might not fall by much so addicts would still consume the good.

Question 8

Evaluate producer incomes in agricultural markets being protected as an advantage of minimum prices

Answer 8

Some producers lose out as economic theory predicts min prices result in excess supply

Question 9

Advantages of emissions trade scheme

Answer 9

A market is created for buying and selling pollution permits so the price mechanism is used to internalise the external costs of carbon emissions.
Incentive given to invest in pollution reducing tech
Cleaner firms rewarded, less environmentally friendly firms punished.
Unused permits can be sold/banked (incentive to reduce carbon emissions)
Revenue can be raised by selling permits instead of giving them away for free.