Cap and Trade

Topics: Economics, Externality, Pollution Pages: 2 (448 words) Published: May 18, 2013
Cap and Trade:

The Cap and Trade idea is defined as, “a regulatory system that is meant to reduce certain kinds of emissions and pollution and to provide companies with a profit incentive to reduce their pollution levels faster than their peers.” I simpler terms this means that the government rewards businesses that lower pollution. They government will set a limit or “cap” on the maximum amount of a certain emission that is permitted to be produced in a business. Then companies are allowed to sell or “trade” the unused segment of their restrictions to other companies that are having trouble meeting the restrictions. A possible positive externality to this idea would be that the money that businesses gain in trading their unused amount under the restrictions stimulates economic activity. Also the businesses that are buying the extra amount that they can pollute will probably attempt to pollute less so that they do not have to become dependent on other companies to prevent going over the “cap.” A possible negative externality would be that a company’s cost to produce would go up because they would have to spend money on making things with less pollution. This may cause a decrease in supply in that certain good. This would affect the consumer because with a lower supply the price would most likely go up. This is a government solution to the problem because the government is the entity that is setting the “cap” on how much emissions and pollution can occur. This is not set by other businesses so it makes it a government solution. Also the government will tax those who go above the set limit and if it was a private solution a tax would not be able to be involved as a consequence. It is also not private because through the trading part of the idea, businesses can trade the any amount of pollution that was below their set goal and this was created as an incentive by the government so that businesses would compete in lowering their pollution levels at a...
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