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The government decides to address negative pollution externalities in a given market by issuing and selling...

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Economics

The government decides to address negative pollutionexternalities in a given market by issuing and selling a fixedvalue of pollution permits. In other words, firms need to pay forthe right to pollute by purchasing these permits. Describe whatwill happen to the price of permits (and why) under each of thefollowing scenarios. Be sure to illustrate your answers with theappropriate graphs depicting any changes taking place in thepermits market.

a) The government decides to allow for more pollution byincreasing the number of permits issued.

b) New technologies emerge making it easier (and cheaper) toproduce while generating less pollution.

c) The economy undergoes a strong expansion and demand forcommodities rises as a result.

Answer & Explanation Solved by verified expert
4.5 Ratings (1129 Votes)
a 1 Pollution permits involve giving firms a legal right topollute a certain amount eg 100 units of Carbon Dioxide peryear2 If the firm produces less pollution it can sell its pollutionpermits to other firms3 However if it produces more pollution it has to buy permitsfrom other firms or the government4 This creates a market for pollution permits with the priceset by demand and supply5 The aim of pollution permits is to provide market incentivesfor firms to reduce pollution and reduce the external costsassociated with it For example it is argued carbon dioxideemissions contribute towards global warming6 Pollution permits can also be a way for the government toraise revenue by selling firms these permits to allowpollutionDIAGRAM FOR POLLUTION PERMITS WITH INCREASEDDEMANDA very simple diagram showing the fixed supply of pollutionpermits Suppose there is rapid economic growth and the demand forproducing pollution increases the cost of tradeable permits risesfrom P1 to P2Pollution permit scheme with cut in supply ofpermitsIn this case the government reduces the number of permits overtime This means the price will steadily increase and create agrowing incentive to reduce pollution over time The idea is thatit gives firms time to try and invest in different technology whichcreates less pollutionPermits reducing demand over timeOver time the existence of pollution permits should reducedemand for pollution Firms wish to avoid paying the cost and finda way to reduce pollution As demand for permits falls the priceof permits will fallIn this case of falling price of permits it may be necessaryfor the government to respond by steadily reducing the supply ofpermits By steadily reducing the amount of permits the governmentcan steadily reduce the quantity of pollutionb Some technologies are important forhelping other technologies reducepollution For example process controls such as metersand sensors can make many production processesmore efficient and less polluting by providingimproved control which reduces waste and defectsA pollution prevention P2 technology is one    See Answer
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