Pollution Tax and Permits to Pollute: Tackling Greenhouse Gas Emissions
Common Test 1 Case Study Marking Scheme (I have provided the broad ideas. Please elaborate on each idea.) 1. Explain the economic case for implementing measures like the “pollution tax” and the “permits to pollute” to tackle the issue of emissions of greenhouse gases. [8]
Explain the economic rationale of implementing “pollution tax” and “permits to pollute”: Both policies are implemented to tackle the problem of greenhouse gases, which causes negative externality (third party spillover effect) in the form of global warming and climate changes that lead to lower health and decreasing economic development. Firms in the pursuit of self-interest (to maximize profits) cause pollution that imposes costs on other members of the society that are not fully reflected in market prices. Thus, the free market equilibrium emission of greenhouse gases will be more than the socially optimal level. Explain what is meant by allocative efficiency. Highlight any similarity and/or difference between the two policies: Both are policies that seek to reduce the level of emissions to the socially optimal level of pollution. Pollution taxes is a market based approach to limiting pollution emissions but permits to pollute is a combination of command and control and marketbased approaches to the task of limiting pollution emissions. While pollution taxes seek to reduce pollution by distorting prices, pollution permits seek to reduce it through quantity limits. Governments or governing body sets standards on the maximum amount of pollution/permits to be given out free of charge). After which firms are allowed to trade these permits on the market for tradable permits. Explain how the pollution tax works to achieve allocative efficiency/evaluation/advantages: Taxation policy allows the government to charge an amount of tax preferably similar to the value of MEC at the socially optimal level of production (the Pigovian tax). Pigovian tax is levied on producers who pollute the environment to
Explain the economic rationale of implementing “pollution tax” and “permits to pollute”: Both policies are implemented to tackle the problem of greenhouse gases, which causes negative externality (third party spillover effect) in the form of global warming and climate changes that lead to lower health and decreasing economic development. Firms in the pursuit of self-interest (to maximize profits) cause pollution that imposes costs on other members of the society that are not fully reflected in market prices. Thus, the free market equilibrium emission of greenhouse gases will be more than the socially optimal level. Explain what is meant by allocative efficiency. Highlight any similarity and/or difference between the two policies: Both are policies that seek to reduce the level of emissions to the socially optimal level of pollution. Pollution taxes is a market based approach to limiting pollution emissions but permits to pollute is a combination of command and control and marketbased approaches to the task of limiting pollution emissions. While pollution taxes seek to reduce pollution by distorting prices, pollution permits seek to reduce it through quantity limits. Governments or governing body sets standards on the maximum amount of pollution/permits to be given out free of charge). After which firms are allowed to trade these permits on the market for tradable permits. Explain how the pollution tax works to achieve allocative efficiency/evaluation/advantages: Taxation policy allows the government to charge an amount of tax preferably similar to the value of MEC at the socially optimal level of production (the Pigovian tax). Pigovian tax is levied on producers who pollute the environment to