Jan 11 2008
Reducing negative externalities – the European market for carbon emissions
Published by Jason Welker at 1:44 pm under
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WikipediaTighter European limits set to push up price of carbon emissions – Times Online
When it comes to correcting the market failure of negative externalities, governments have several options. The most interventionist approaches may involve placing strict limits on the amount of a pollutant firms are allowed to emit and fining them for exceeding this limit, taxing firms that pollute in order to increase their costs and decrease market supply, reducing output and increasing price closer to a socially optimal level, or simply banning the production and consumption of goods whose existence places excessive spillover costs on society.
Such interventionist approaches to externality reduction tend to require a complex bureaucracy to administer, monitor, execute and enforce. The government may not be able to determine the appropriate level of a tax on a polluter if it can’t determine the exact level of the externalized costs placed on society; the government cannot always check up on every producer in the economy to determine just exactly how much pollution each factory’s producing, and then levying a fine on excessive polluters again raises the question of how high should a penalty be?
Because of the complexities involved in the interventionist approaches above, economists have recently promoted and the worlds’ governments have begun adopting a market-based approach to reducing negative externalities, involving the creation of a whole new market: one in which the right to pollute is bought and sold by firms. This may sound crazy at first, but here’s a basic summary of how these markets work:
- A government or international agency decides on the acceptable amount of pollution in a particular region and issues permits that firms can purchase giving them the right to pollute. Each permit will allow a certain amount of pollution. The total supply of permits is perfectly inelastic since it is decided by the government agency.
- The demand for pollution permits is downward sloping. At high prices, firms will either stop polluting or pollute less by acquiring pollution-abatement equipment, which is more attractive when the rights are more expensive. If the “cost of pollution” is cheap, then firms will chose to buy permits rather than acquiring expensive abatement equipment or upgrading to “greener” technology.
- In the market for pollution permits, the “price to pollute” will be determined by the downward sloping demand among firms for pollution permits and the perfectly inelastic supply of permits determined by the number issued by the government. If the price of permits is too low to make firms bear the full environmental and social costs of their production, the government can reduce the supply thus increase the price and decrease the quantity of pollution permits demanded, reducing the negative externalities of pollution as firms will shift to greener production techniques.
There are several advantages to this system over direct government controls:
- It reduces society’s costs because pollution rights can be bought and sold. Some firms will find it cheaper to buy the rights than to acquire abatement equipment; other firms can sell their rights because they may be able to reduce pollution at a lower cost. The incentive for all firms is to reduce their own pollution and sell the permits they no longer need, adding to the profits of “green firms”.
- Conservation groups and individuals can buy permits as well as producers. If conservation or individuals wish to make it more expensive for firms to pollute, they can buy permits and hold them. This drives up the price of remaining rights, further encouraging polluters to reduce emissions.
- The revenue from the sale of pollution rights could be used to improve the environment or subsidies more environmentally friendly methods of production.
- The rising cost of pollution rights should lead to improved pollution-control techniques.
In the article above, we see how the creation of a market for carbon pollution permits in Europe evolved from a fledgling, ineffective experiment in market-based externality reduction a few years ago to a major market where billions of dollars worth of carbon permits are exchanged each day between firms, all of which have incentives to continually reduce their level of carbon emissions so as to minimize their costs and perhaps even earn revenue through the sale of unneeded permits.
The first phase (of the carbon permit market) was launched in 2005 but was widely dismissed as a failure, primarily because too many permits were granted by member states to individual polluters, leading to a collapse in market prices to as little as €1 (74p) per tonne. The slide undermined the principle of the scheme – to make carbon emissions a meaningful cost for big polluters, thereby encouraging reductions.
The key difference in the second phase is a reduction of between 5 per cent and 10 per cent in the emissions permits granted. Mr Marcu said that he expected the tougher regime to “start delivering some substantive reductions” in carbon emissions.
City analysts believe that it will lead to a big increase in the market price of carbon. Deutsche Bank expects forward prices to rise from the present level of about €23 a tonne to €35. UBS has predicted a rise to €30 a tonne.
35 euros per ton of carbon may not sound like a lot, until you consider how many millions of tons of carbon are emitted by the big factories of Europe each year. In fact, when we realize the size of this market at $100 billion, we then begin to grasp just how significant such a market can be in reducing greenhouse gas emissions. That means that firms are spending $100 billion for the right to pollute!
Just imagine, if you were a manager of a firm that was polluting heavily, the more expensive these permits get, the higher your average costs of production get, the less competitive you become with firms who have taken steps to clean up their production. Not only do you not have to buy as many permits once you start cleaning up, but you actually start earning revenue by selling the permits you no longer need!
A market for externality permits minimizes the role the government must play in managing the production and emission practices of the economies big polluters. Furthermore, if the permits are auctioned off from the beginning, billions can earned in revenue for the government, which in theory could be used to subsidize the research and development of pollution abatement technologies and “green energies” like wind and solar power.
While it still may seem weird that governments are giving firms the right to pollute, the logic of such a plan makes sense once the picture is clear. Markets work, even when they’re being used to correct a market failure.
Discussion questions:
- What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
- Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
- What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". Related posts:
- Obama’s carbon market: an introduction the market-based approaches to pollution reduction
- Robert Reich on Obama’s “cap and trade” plan for the environment
- An answer to Kevin Yeh’s excellent question about emissions monitoring…
- Negative externalities of consumption: Britain’s “inebriated hooligans”
- Market Failure and the role of government in the economy ~ an introduction to Environmental Economics
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Before reading this blog post, I found an article for homework about the aviation industry in the EU. Here is the website: http://www.sciencedaily.com/. It is kind of creepy how right after I print out the article, I read this blog post. The two seem to be perfectly connected, as the article I found, titled “Climate Pollution From Aviation Increasing”, talks about the carbon emission from EU’s aviation industry, and their suggested solution is, you guessed it, pollution permits.
Is it simply a coincidence, or are pollution permits extremely popular in Europe?
Pollution permits are extremely popular in Europe… good work Helen!
It’s very interesting how this whole marketing pollution rights works. In this way the “commons” in the tragedy of the commons becomes privatized, and companies are forced to take responsibility for their pollution which is being dumped into the atmosphere.
I do have one question, though, and that is how does one regulate the amount of pollution a factory dispenses into the air? How can the government be sure that a firm is not violating the law by dumping more than its licensed amount?
Kevin,
Great question. I don’t know the whole answer, so I have forwarded your question to the environmental Econ professors Tim Haab and John Whitehead who write the blog http://www.env-econ.net/
I will post their reply hear once I get it!
-Mr. W
It sounds like a localized version of the Kyoto Protocol, which makes me a bit nervous because the Kyoto protocol didn’t really work. But some environmentalists are saying the optimal amount of pollution is only economically speaking, environmentally speaking, it’s still to high. So, whilst this may be great economically and environmentally, what happens when one day the optimal amount of pollution is reached and the planet is still building up pollution because pollution levels are still to high for the Earth to recover?
When I first read about the buying and selling of rights to pollute in the textbook, I found the idea pretty weird. However, now that I know the benefits the society obtains from this system, it makes a lot of sense. All in all, I think this will help improve the environment as it discourages polluters to pollute, and money from the buying and selling of these rights can be used to further improve the environment.
As a member of Roots and Shoots, I feel like i need to say pollution is BADDDDD. However, I have to admit that these “rights to pollute” are a pretty good idea in our fast paced, technological world. If we can’t get people to stop polluting, then we might as well charge them for polluting. This way, at least SOME people will stop or produce less. Also, it gives them further incentive to stop polluting if everyone is competing to see who would have the least costs. I really hope these rights to pollute become more popular and effective, not just in Europe, but everywhere.
Doesn’t the UN already set quotas on the carbon emission rates for all of the Kyoto Protocol signatories? This would work really well with the rates being sold to private sectors, because the nation must determine the rates that the government will consume in order to benefit the people, while the remainder can be bought by businesses or organizations. This way, the supply of the right to pollute the air will be severely reduced, driving up the price of the rights, and hence decreasing the demand.
Yeah the right to pollute sounds a bit contradictory to me. It makes sense the way they have it so that these “rights” can be sold from one to another based on how well you take care of your environment and it certainly has potential. The only thing needed to be worried about is honesty and corruption. Companies might just pay off people or mess with measurements.
The market for pollution rights is parallel to the market for products that impose negative externalities on society, such as cigarettes. Completely banning either would not owrk (black markets would emerge) so governments might as well try to benefit as much as possible through taxes from the production of pollution and cigarettes.
This idea of buying and selling pollution rights is a good start to actually tackling the issue of climate change and the problems it pose to the environment. It seems like the part of the world that seems to be doing something good for the world is Europe. After seeing the success that Europe has had with this program and how carbon emissions have been cut, the US should follow suit (if it hasn’t already, and I doubt there is such a thing there).
I think the rising prices per ton of pollution show a good sign towards environmental awareness. I can see this as pressure from the government for companies to spend the money in researching new technologies to cut down their carbon emissions. Do you guys think such a plan would work in China?
I have heard about this idea of the “right to pollute” and it can help in many ways. If a firm feels like they are going to be producing a lot of pollution, they can buy more rights to pollute. In some cases, they can also buy some rights to pollute from other firms who do not pollute as much. By making a whole new market and using economic methods for this problem, it seems like it is going to work very well.
The “right to pollute” is even being adopted in the states as methods to control pollution. For instance, large chicken farms in the US are now required to pay annual permits to raise their poultry because the bird waste pollutes the surroundings with excess nitrogen and phosphorus. Similar to the EU’s view, US senators see buying the rights to pollute as a method of regulating companies which are producing goods at the expense of the environment.
This concept of the “right to pollute” appears to be a viable solution towards restricting companies from emitting CO2 and other GHGs; however I have a few questions towards the “right to pollute” in individual nations. As mentioned before, one nation’s pollution not only affects the nation producing it, but those it around it as well. Thus, my question is how can one nation, that adopts the pollution permit idea, fairly determine the amount of pollution it is allowed to produce, when neighboring nations do not adopt the “pollution permit” concept? For example, some nations in Europe have adopted the market for carbon emissions, but its pollution will still affect other nations and add to the total pollution produced. So if other nations, that do not adopt the concept, and continue increasing to produce, will it affect the supply of the nations that have the carbon emission market?
The notion of buying the right to pollute seems like it would work extremely well, but I would like to propose a scenario (though it may be rather extreme) that I’m not too sure how firms would economically respond to:
In this blog, the ability of environmental awareness groups to purchase these rights to pollute and hold them to lower the amount of pollution is an interesting idea. But what if all the environmental awareness groups somehow form an alliance and essentially buy all the permits to pollute and hold them off? What will happen to the economy?
‘Course, the best response for the world is that because the firms that need to buy these permits can’t since the environmentalist groups aren’t even selling (consider the price of one permit to be infinite, if you may), and thus all the firms will commit to researching for methods to abate the amount of pollution emitted by their factories.
However, is that likely? Research for this sort of technology is extremely expensive, and many firms will likely have to shut down due to their inability to achieve any success with this sort of research.
Another possible outcome to me is that the firms simply secretly pollute. Many people question in earlier comments of how a government will be able to monitor the pollution of every plant, and because the government likely won’t be able to the monitor every single plant, the plants will just secretly pollute.
Finally, the scariest potential outcome of the 3 in my opinion… Will the government, for the sake of keeping its economy up and running, begin to sell more permits to pollute exclusively to the firms?
I think the pollution permits are a great idea and should be able to control the amount of pollution released into the air. Also how they can make money by selling the permits when they don’t need it anymore. The countries that need this method of pollution control are the developing countries since they pollute the most. If China had pollution permits and there was a fixed amount of permits, the air here would be much cleaner.
I too have the same questions as some of people that commented. How can you be 100% sure that the amount of pollution released into the air is the amount they say it is? isn’t there like a way where they can alter the numbers? Also if the country is really desperate and they can not find another way to keep the economy up, would they resort to selling more pollution permits?
I tip my hat to the European environmentalist economists who came up with this plan. The US should definetly adopt this solution for market control. I love this idea, although there are some things I’m not sure about. Like someone mentioned above, what if a company is unable to purchase pollution permits because all the environmentalist groups have bought them all and the company would have to close down. This would cost many people their jobs. Is it morally right to put hundreds, or maybe even thousands of employees out of their jobs and potentially ruining their lives?
This is obviously on the major steps towards slowing down the issue of global warming and pollution in general. By making a market out of something that normally would be free, the EU has successfully (and will gradually) fix the problem of pollution. Now if only nations like China would adopt this sort of methods.. We wouldn’t be drowning in an atmosphere of 170 API…
One of the largest problems corrupting the modern world is the pollution problem. As we know, the pollution problem is causing the global warming and sudden deaths of many living organisms. However, as some people have already said, this new policy will obviously be a major step toward the slowing down of the global warming. Even though the price of carbon would rise, this policy will eventually protect the enviroment. Moreover, I agree with the idea that if China would adopt this policy like the EU, the global warming and other pollution problem will slow down dramatically.
This solution is simply brilliant! Just think. You have an incentive to be a non-polluter. But if for instance one year you screw up, you have to pay. Big time. The prices will probably be more than what the government will charge you, but at least you get to keep your business’s nose clean. So next year you decide to clean up your act. In the long run it will allow for more people to get clean, and not put so much bad stuff into the world around them.
It is a little bit scary that firms are willing to pay $100 billion dollars just for the right to pollute the air that everyone breathes. But putting a price tag on pollution makes it somewhat fair. Now instead of polluting the environment endlessly, factories have to think about the costs placed on them from purchasing the pollution rights. Further causing less pollution would be the fact that all the money they are paying will be used to help lessen pollution. I also understand that if an environmental group did not like the pollution they themselves could purchase the pollution rights. However, the problem with this is that they will have to raise the money, whereas businesses are constantly making money from their products. Therefore, although this seems like a fair compromise polluting businesses can still have their way as long as they are making good profits. I mean how can an environmental agency genuinely compete with a multi-million dollar company? But then again pollution is still lessened through pollution rights, so overall they are a good idea.
This isn’t the first time i heard about this, last year in environmental science we talked about the selling and buying the right to pollute, when I first heard about this last year, i was like wow people actually pay for it to pollute. Setting a price for the right to pollute is a great idea, this would cause
firms to reduce the amount of pollutants they release to the airs. These years global warming has become one of the biggest problems we are facing; I hope the selling and buying the right to pollute will slow down the speed of global warming. =)
i think that the system of pollution permits are helpful to reduce pollution and at the same time also somewhat push the economy. Environmentalist groups who buy these permits and kept them for the goods of the people are largely appreciated and more firms should start to support these groups as the issue of global warming continues to increase. I believe that if all other countries start to adopt this policy global warming rates could slow down by a lot and also help the economy.
[...] Towards the end of our last Micro unit, which was on Market Failure, SAS AP Econ student asked a good question in a comment on my blog post “Reducing negative externalitites – the European market for carbon emissions” [...]
What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
The government could invest the revenue in finding greener and cheaper methods of production. Pollution permits are easier to use than strict government control because less enforcement is needed and the businesses can only cause so much pollution this way. Incentives encourage more environmentally friendly ways of production, which leads to less negative externalities. A market for pollution permits increases the incentive to reduce emissions than direct government controls.
Response to optional.xu: Yeah the right to pollute sounds a bit contradictory to me. It makes sense the way they have it so that these “rights” can be sold from one to another based on how well you take care of your environment and it certainly has potential. The only thing needed to be worried about is honesty and corruption. Companies might just pay off people or mess with measurements.
Honesty and corruption wouldn’t be a problem because the businesses have incentives to lower their emissions. It is in their best interests to reduce emissions, because they’ll have to pay less money that way.
I think this carbon emission permit is a great idea. Firstly, it helps government to generate income, which can be spent on offering subsidy to research and develop new ways to lower the carbon emission or it can simply be used on offering social welfare, such as health and education to the public. Secondly, it is also an effective way for the government to control the amount of CO2 emitted compare to strict government control as it creates additional ways for firms to generate revenue: the firm can research and develop new ways and technology to reduce the amount of carbon emitted, which saves its costs paid to the government. When the firm has reduced its emission to a very low level, it can then sell its permits to other firms, which generate additional income. Another firm which bought the additional permits will then think it is expensive to buy more permits and start to implement devices which lower the emission and it can now sell its permits to another firm. This creates a cycle of lowering the firm’s emission and hence this is a more effective way of setting a fixed quota of carbon emission for each firm by the government.
To John.ecsla.f09
I think your response is great. However, you did not explain why this is a more effective way of reducing the carbon emission, rather than just a set government quota. (You kind of said firms have more incentives, but please explain more)
To John.ecsla.f09. I think your response is great. However, you did not explain why this is a more effective way of reducing the carbon emission, rather than just a set government quota. (You kind of said firms have more incentives, but please explain more)
1) What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
This is a good investment since this revenue could be used as beneficial to the environment and to create, as the text says, environmentally friendly ways of producing. Such as making the big companies that pollute so much and are so harmful for the environment change their habits to more friendly ways of producing towards the environment.
2) Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
Because in the case of pollution permits, the government can just increase highly the price of these rights to pollute. People, private properties and companies will easily agree to depend on the government control of the pollution and the individual control of pollution.
3) What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
I think incentives in achieving reduction of negative externalities such as the environment pollution and global warming are very important. It is important that we become aware of these issues and try to solve them. However, I think government controls create more incentives towards a world free of pollution.
To Julie.lin. I also think this way Julie. You are right about the fact that we should all apply this method to ease the problems with the environment. And we could benefit two element at once, as you said: the environment and the economy! ?
To Leyre.ecslb.f09
It was a nice point to explain in your second question response but not only the second question but also I think you needed to explain a little more in detail in all the questions in some points. Thanks for reminding me some key points that I can repond to those questions.
JiYoon
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
The revenue from the sale of these permits, granting large companies permission to pollute and so damage the environment, could in turn be used in a positive way to clean up the environment and also to promote the environmentally friendly. The companies promote the manufacturing for goods for recycling.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
- it is easier to implement because incase of pollution permits, the government can increase the price very highly to pollute. So, in many companies and people will state their agreements and also disagreements. Also, in the case of government control, they simply do not have the resources required to observe every single company to ensure they abide by environmental regulations. In this way pollution permits are much easier to enforce, because companies have to pay a fee is they choose to pollute – this revenue can then go to allieviating the pollution.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
I think incentives are necessary in order to achieve a reduction in negative externalities. establishing a market for pollution permits will be a much more effective way of reducing emissions contributing to global warming than direct government control, which cannot be relied upon to induce a great change.
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms? There are many excellent ways that a government can invest the revenue earned from the sale of pollution permits to firms. However, I think that the best way is that all of this money should be put into one pool in which funds solemnly the progress of alternative energies and funding initiatives which are making changes to the amounts of pollution released (in all forms: cars, factories, etc.). The amount of revenue that can be generated from these permits is immense and I genuinely think that the right way to allocate this money is to help improve the progression of the world in terms of keeping the planet green and clean.
2. # Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms? The market for pollution permits is easier to implement than strict government control because there is less regulation needed with the permits, it is basically left up to the individual businesses to handle their permits and sell them off to each other. With strict government control there is a lot of government attention needed to assure the proper follow through of the regulations and thus it might not be carried out as effectively since it is harder for the government to properly evaluate which businesses are producing too much waste or are not following the rules, etc.
3. # What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls? The importance of incentives in achieving reduction of negative externalities is the motivation that they bring to the producers. With the market of pollution permits, there is motivation for the producers to increase their profit by coming up with more environmentally friendly production methods and then by being able to sell their permits. The personal profit comes from reducing the amount negative externalities that they produce; basically the permits are motives for them to branch out in alternative production methods. With the strict government control, the business are more likely to try and cheat or simply follow the bare minimum of what they need to do without actually putting any effort into it.
To Leyre.ecslb.f09
I am a little confused about your answer to #3…
Why do you think that government controls create more incentives? What about them do this?
Maybe I am not understanding your answer, but to me, a government control would create less incentive since the control are forced upon them.
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
There are any number of ways the government could invest the revenue they make from selling pollution permits, however I think if the money was earned by selling pollution rights, it should be spent in a way that helps the environment. For starters they could further this project and put it towards developing new greener technologies. Really any way that uses the money for public good and positive externalities and has to do with the environment would be fine with me.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
Firms are always going to be polluting, if they have to buy the rights to do so, it’s a lot easier for the government than if they were to have to stand their policing firms on exactly how much pollution they could put out. Plus this way earns revenue for the government.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
I think a market for pollution creates more of an incentive for pollution reduction but in a sneakier way.
For example: If your mother (in this analogy the government) tells you to clean your room and tries to force you to do it, you won’t want to. If however, she just tells you it’s optional to clean your room, but you will have to give up your allowance if you don’t., then you still have the option of not doing it and paying the price. This makes it seem like it’s your choice to clean and you did it because you wanted to, not because you were being told.
to jiyoon.ecslb.f09
When you say in your answer for number two that the government could make the price for the permits very high, do you think this is fair to smaller companies? They might not be producing as much pollution and they generate far less revenue overall in many cases, so do you think it fair that they pay the same price for a pollution permit as the larger chain corporations?
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
The most logical way of spending the revenue earned from the sale of pollution permits would be to use it to improve the environment or to grant subsidies for more environmentally friendly ways of production. Money could also go to research about how to make production more efficient, i.e. so that less pollution occurs.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
The permits are administratively cheaper and easier to control; as the regulatory agency needs to have no information regarding the firms’ costs- it simply has to issue the permits and arrange for their sale. Also, it would be incredibly time-consuming to test each firm individually on their individual amount of pollution.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
Incentives are of high importance, because without them, firms would never try to achieve a reduction of negative externalities. Individuals, as well as firms, always act upon their own, personal benefit. Firms don’t have any (marginal private) benefit from reducing pollution and therefore they will not do so, as marginal social benefit is not considered in their thinking. So if there is an incentive, firms will have a “benefit” from polluting less, as they have the choice between polluting a lot and paying a lot or polluting less and paying less. I think whether a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls depends on the elasticity of the good sold. If the good is completely inelastic, then government controls do not bring an incentive at all, as the firms are likely to carry forward the cost of the tax imposed by the government to the consumer (and the consumer will continue buying it, seeing as the product is inelastic!). If the good is elastic however, government controls create more of an incentive, since firms will seriously have to start thinking about how to reduce pollution in order for the cost of tax to decrease, because they know that if the price of their product increases, demand will decrease by a large amount.
I agree with the points you made in #1 and #2 and I love your example of a mother telling you to clean your room! If I understood you right you are saying that both ways of reducing pollution have the same incentive, but market for pollution permits does it in a nicer way for the firms. Did I understand that right!? If that’s the case, then I have to disagree, I don’t think that they create the same incentive. I think – and wrote so in my blog- that decision of which resolution is creates more of an incentive depends on the elasticity of the product the company sells. If the company sells an inelastic good and the government imposes direct controls in the form of tax, then the company might as well pass on the extra cost to the consumer, (and seeing as the good is inelastic, consumers will keep on buying it) and vice versa with an elastic good. Would anybody dis/agree?
* I meant to comment on stephanie.ecslb.f09
1) What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
I think that in the most important place in which state should invest this revenue is in restore the damage that this negative externalist has produce (reforestation is a very good example)
2) Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
I am not totally agreed with this affirmation. In one hand it is easy to control because is not difficult to find the one that create the pollution and obligate to fallow the rules. In the other hand is difficult because is not easy to measure how much a company pollutes and to decided what be the quantity of permission that one company should have
3) What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
Is important to incentive the companies to control the negative externalist because the market will not obligate them to do it (normally in the market only the private benefice/cost is taken anther consideration). I think that the market for pollution is the best form to incentive because it provokes that the law of supply and demand to affect the negatives externalist
To Leyre.ecslb.f09
I think that to implement than strict government control of the pollution of individual firms is not that easy. It had some problems such as how much permission to pollute you gave, how you measure the quantity of pollution that a company creates (is this is difficult to ensure that the companies don’t make traps such as contaminate during the night, when any one is looking)
I agree with what everyone has said regarding the ways that a governmet could or should invest the revenue that they receive by selling pollution permits. Boiled down, I believe that this answer comes in two main parts; first, the development of technology which does not create as much pollution as the current technology, and second, in moving to repair the damage already inflicted on the environment due to polluting firms.
In my opinion, a market for pollution permits is easier to implement than a strict government control because there is a more tangible cost to the firms if they do not comply. I love Stephanie’s analogy of cleaning your room, and I think it applies here perfectly. Also, and this might just be me, but I think it’s simply more enjoyable to participate in a market for pollution permits than to submit to a strict government. In a way it’s more of a game – a game of wits and resourcefulness.
A market for pollution permits creates more of an incentive to reduce pollution emissions than direct government controls if (and that’s a rather big if) the supply of pollution permits is limited. If there is a massive supply of pollution permits, then the companies are able to purchase them for a relatively low price, and thus they are able to continue polluting at the same level, (or possibly even higher, due to reduced guilt). On the other hand, if the number of pollution permits available is limited, then the polluting firms are not able to afford the pollution permits required to continue at their previous level of pollution, and they will thus reduce their emissions.
Kerstin.ecslb.f09,
I agree whole heartedly with your idea of elastic/inelastic goods.
Also worth mentioning, is the fact that some companies, regardless of the elasticity of their product, produce more pollution than others. This difference in pollution could be the tipping point for success of certain companies. If the good a firm sells is inelastic, the pollution permits could actually end up being almost a good thing for the firm, because the cost would be placed on the consumers due to the inelasticity of the good. Visa versa, for an elastic good, the pollution permits could send a company into bankruptcy…
The government could invest that money in developing “green” technologies.
The market for pollution permits doesn’t cut into profits as much, nor does it require nearly as much government involvement.
An incentive encourages companies to pollute less, thus helping the environment. A market for pollution permits creates more of an incentive, as companies can go under their limits and sell the remaining permits for a profit.
pedro.ecsla.f09:
Yes, reforestation is another area where the government should spend that money. However, the permits are definitely easier to control. And the government will do anything to ease their workload…
Another advantage to pollution permits is that the government then can invest the revenue they earn from the sale of such permits in a variety of ways. Sticking to the theme of pollution and the environment, the revenue could be put forth in other pollution reducing programs or charities. Or it could go to research in various environmental fields. The government could devote this revenue entirely to these kinds of fields, or it could be divided and incorporated to any of the government’s spending areas. The money could go a long way in helping any community due to its large volume, since it is a 100 billion dollar market.
Implementing this market for pollution permits is easier that strict control of pollution because strict control requires a “complex bureaucracy to administer, monitor, execute and enforce”. It would be difficult, expensive, and time-consuming for the government to determine the appropriate level of tax on polluters, determine the exact level of externalized costs placed on the society, as well as check up on each producer in the entire economy.
A market for pollution permits creates more of an incentive to reduce emissions, rather than direct government control, because with the market there are choices for the firm to make. The firms do not have to accept the extra taxes placed on them by government, they can buy more permits, or buy ‘greener’ machines and reduce their pollution from the process. This choice, which the companies are free to make, provides an extra incentive in that the company can even make a revenue by selling their permits.
Regarding Jessica Chiang’s comment,
I agree. Of course pollution is still dangerous and the only real solution is ceasing all together, creating this market for pollution permits is a real step in the right direction. Not only does it stimulate the economy by generating another market for which the revenue can be allocated to whatever the government needs most of, but also it actively reduces pollution that is created by large companies.
The government could invest the revenue earned from the sale of pollution permits to firms in green technology research or converting some technologies to greener technologies. A market for pollution permits is easier to implement than strict government control because the firms will keep the other firms in check. Firms like having control of the things they do, and the permits allow them to have control. If the permits don’t work, the government would have to be involved and the firms would lose control. The importance of incentives in achieving reduction of negative externalities is to keep companies reducing their negative outputs. Without incentives, companies will not reduce their negative outputs because they have no reason to. A market for pollution permits would create about the same amount of an incentive to reduce emissions as direct government controls because they have to pay to pollute, and with government control, they would most likely have to do the same thing.
Regarding michael.escla.f09’s comment, I definitely agree that the government could use the money for green technology research and implementation. I think it somewhat encourages companies to pollute less, but it also is not 100% effective. It does make it easier for the government because they don’t have to be as involved.
1) What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
The most important thing the government should do with that money is to restore the damage caused. Another way could be to provide subsides so the firms can find more suitable to purify instead of pollute.
2) Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
The pollution permits are cheaper and easier to control than a strict government control. Having this control would consume a lot of time and labor work to assure that nobody is breaking the law. And, moreover, it is not easy to measure how much a firm pollutes. This control would need a lot of infrastructure and labor to be effective.
3) What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
If companies do not receive an incentive when they reduce the negative externalities, they would not do it, this is because these externalities do not affect to the market and in a marginal analysis: there is no benefit and a big cost in reducing these negative externalities. Markets for pollution permits is the best way to incentive the firms because it affects on the law of supply and demand of the product.
To Celine.ecslb.f09,
I do not think that the best to invest that money from the pollution permits is to make a pool for the progress of alternative energies because that it is not an immediate incentive for the firms and; further more, how can these alternative energy goods be distributed in proportion of what the firms have paid? However, if you give subsides to develop alternative energy goods, you are ‘making them invest on these goods’ and if the subsides is good enough and they will probable switch to alternative energy goods such as cars, factories, etc. which will help the environment as well.
In response to the question about why this system would be easier to implement than interventionist methods, I cannot see how it would be any easier. It is not correct, to my understanding, to define the right to pollute market as not being an interventionist measure. The government is still defining how much pollution can be produced over a given time span, and forcing firms to buy the right to a portion of that amount. The system would still require a new agency to manage the trade. An environmental study would be given the monumental task of deciding how much pollution is allowable, which is a bigger task than it first seems to be. Also, there is still the matter of enforcement. Just because the system is based on the free market does not mean there won’t be firms trying to beat the system. The system would still require the same resources devoted to enforcement as would any of the other measures. It is for these reasons I reject the hypothesis that it would be easier to implement this system than any other system aimed at reducing pollution.
Assuming the implementation of this system is successful, the revenue gained could be used to finance research into technologies aimed at reducing pollution. Reforestation and other environmental cleanups would be key as well.
As to the question of incentives. It is important for there to be incentives put in place for reducing pollution. A rational firm will only do what will turn a profit, and if there is nothing to be gained from reducing pollution, the rational decision would be to make no changes. This system would provide incentives for pollution reduction only if the price of the shares of the pollution quota were high enough. If this was the case, it would be less expensive to reduce pollution than it would be to simply buy the shares.
to kerstin.ecslb.f09,
Wouldn’t the government still have to measure each firm’s pollution to make sure they are not polluting more than they have bought permits for? It seems many of the people on this forum are forgetting that even a free market has rules that have to be enforced. Who would foot the bill for the enforcement of this system?
1. The government could invest the money they make into research for improving technologies. For example in machines that are less poluting than the ones used currently.
2. It is easier to implement pollution permits, as it uses the concept of a market. And it would be very hard to check if companies stick to the regulation. Firsty it would need a lot more people to check and companies could still cheat like polluting at night.
3. There are social benefits of reducing negative externalities, as people health is getting less damaged mostly, for example frome pollution. I think that it is better for the government to make a maret polution permits than putting strict controls because the government can make a profit and if it is really strict it is more likely that people cheat.
to victor.ecsla.f09
For question three you do not really talk about the importance of incentives. But for questions one and two this could be an option of how to use money and these pollution permits.
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
Some of the ways a government could invest the revenue earned from the sale of pollution permits to firms would be to reduce taxes. As the government would be gaining large revenue due to these permits, they will not need to tax the general public as much. Another option would be for governments to put the money towards public goods and/or merit goods such as infrastructure and health care. The best option would be a combination of the two.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
A market for pollution permits is easier to implement than strict government control of the pollution of individual firms because it saves the government time and effort it does not need to spend on quantifying the value of many social external costs. It allows governments to create a standard which all companies which pollute must pay for and allows the government to collect revenue at the same time.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
Incentives are very important in achieving reduction of negative externalities because companies need a reason to invest in environmentally friendly equipment. Without an incentive, companies will see no reason to spend so much money and will continue to do what they do at the same rate. The market for pollution permits can create more incentive to reduce emissions if the price of the permits is high enough, too low a price and firms will continue to find it cheaper to buy permits and implement new material.
response to Victor.ecsla.f09
Would firms really deserve to be subsidized if they force the government to create permits for them to stop? As important as it may seem to reimburse the firms, the citizens need to come first. Using that revenue to help the civilians will cause them to be happier, and when civilians are happier, they have more time to look into things. Just like during the Enlightenment, it allows the general public to gain new information and gain new and sometimes more economically sound insight into issues.
1) What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
Revenue could be used for several different purposes. It would probably be most fitting; however, if the money was invested in researching and creating innovative “green” technology that would decrease pollution and protect the environment. “…billions can earned in revenue for the government, which in theory could be used to subsidize the research and development of pollution abatement technologies and “green energies” like wind and solar power.”
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2) Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
Because a negative externality such as pollution has no market, firms do not feel obligated to protecting the environment. No matter how strict the government becomes, it won’t really have a lasting nor very effective impact on how firms behave because interventionist approaches such as excise taxes, fines, bans, and quotas “require a complex bureaucracy to administer, monitor, execute and enforce.” However, if a market for pollution permits was implemented, these negative externalities would now become part of the private cost since it now has its own market. Firms would have to pay more if they pollute, thus deterring them from doing so. There’s nothing that firms hate more than losing money and with such a market in place the pollution issue will be resolved. A market for pollution permits will in turn help keep the environment cleaner, increasing social benefit. This would also be less of a hassle for the government.
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3) What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
A market for pollution creates more of an incentive to reduce emissions than direct government controls. A market would keep the firms in check and would work more efficiently than the government would. A central authority can only do so much to monitor what firms do. Markets make the job much simpler and a lot easier. “At high prices, firms will either stop polluting or pollute less by acquiring pollution-abatement equipment, which is more attractive when the rights are more expensive. If the ‘cost of pollution’ is cheap, then firms will choose to buy permits rather than acquiring expensive abatement equipment or upgrading to ‘greener’ technology.” In other words, no matter what the situation is, firms will be less inclined to pollute because of the private cost.
John great answer!
It’s concise yet very detailed and completely true. The government will be helped as well as the environment. And, firms will be forced to pollute less without as much regulation
Victor that is an interesting alternative.
I never thought about subsidies. However, the point is for the government to make money while at the same time, reducing pollution, hence the market for pollution permits. It kills two birds with one stone.
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
1. The government could invest the revenue earned from the sale of pollution into promoting and advancing the use of ‘greener’ technology. By using this system, not only would the government be indirectly causing the promotion of more carbon-efficient technologies, but they could also directly effect it by investing into research.
2. A market for pollution permits is easier to implement than strict government control of pollution because it is nearly impossible to set a firm tax on something like pollution that is so hard to regulate. Direct government intervention will only anger companies and probably not be effective enough to prevent them from not polluting. On the other hand, the market for pollution permits allows companies to pollute, but only when absolutely necessary, since they will not want to waste money buying permits if they do not abosolutely need it.
3. The reduction of negative externalities will lead to incentives for the government and the companies. This indirectly forces these firms to begin investing in more carbon-efficient technology, which in the long term will be more cost effective for them, because they will not need to continue buying pollution permits. On the other side, the government is making money off of helping these firms become ‘greener’.
@victor
I like the idea of subsidies, however, the market for pollution permits will probably still be more efficient in the long run. With subsidies, there is some incentive for firms to begin using newer, pollution-free technology, however the pollution permits bring the same incentives while the government makes money.
2) the idea of creating a market is easier to implement because it will encourage firms to deal with their externalities in an economic fashion. meaning they will be cooperative in research (lowering their own costs or selling their permits).
Additionally, it means the governemnt will be receiving revenue from the committing companies rather than spending on regulations and court cases. This money can be better spent on other environmental concerns such as investing in recycling programs.
1. A good use of the revenues earned from the sale of pollution permits would be too invest it into the environment, by maybe using more environmentally friendly technology; or by subsidizing firms that provide merit goods that promote a greener environment.
2. A market is easier to implement than strict government control because the firms are going to respond better the market approach as the firms will have the incentive to lower their costs and only pollute when necessary. This will also be beneficial to the government as they will gain the revenues from the pollution permits.
3. Incentives are important to achieve a reduction of negative externalities. A market for pollution permits is more effective than government controls because markets create more incentives. When there are high prices, firms will reduce their amount of production or invest in environmentally friendly equipment. However, if the permits are cheap to them, then the firm will buy permits which limits their emissions. Either way firms will pollute less based on their private costs.
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
Perhaps the most logical way for governments to invest this revenue is in research and development for pollution prevention and mitigation. That way, the money earned from companies who pollute goes towards stopping polluition.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
It reduces the cost to companies, as it creates a market where firms can buy and sell. This means that “green” companies can make more profits. Also, conservation groups can buy permits and hold them. This would increase the cost of the permits, allowing these groups to have a real effect on the issue. Also, the money earned by the government from the sale of the permits can go towards pollution mitigation efforts.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
Firms are profit-centered. With a financial incentive, firms have a reason to reduce the externality. Without the incentive, firms will be unable to benefit in any way from reducing pollution.
Mhairi,
Wouldn’t direct government controls increase costs as well? If a firm faces threat of legal action if they fail to meet the requirements, then that would be an incentive for them to decrease pollution. Yet even with this in mind, I would consider the market system to be much more effective. It removes the opportunity for bureaucratic corruption and gives firms financial incentives rather than straight restrictions.
1. They could invest this revenue first and foremost in reducing their own burgeoning national debt if they are one of the many countries who have this issue. Aside from this, they could reinvest such money into other entities such as schools, infrastructure, or other public works projects. If they really wanted to be serious about stopping pollution, they could funnel the money to not-for-profit environmental organizations in the form of subsidies with the stipulation that the money from the government be used at a later date to purchase these pollution permits from companies that need to earn some extra revenue themselves.
2. The implementation of pollution permits requires the creation of a commission, probably headed by the Energy Department of the nation undertaking the measure, to smartly allocate these permits and control prices. Businesses still have the freedom to make their decisions on the actions they want to take (although the system should be designed to where they will be encourage to pollute less). Under direct government control this possibility is not present. It chokes businesses who may not be able to make the quick and drastic shift necessary, closing many firms and creating a skyrocketing unemployment rate. This would be more detrimental to the overall economy.
3. Many times firms will only act if it is in their best economic interests to act, or the law requires them to meet some obligation. Therefore, incentives to take a particular course of action will push businesses in the right direction without taking complete control over their balance sheets and dictating policy to them. A market for pollution permits creates less incentive than direct government controls, however, one must be realistic with the options available. Firms come in many shapes and sizes. Overarching controls do nothing but hurt the businesses and may lead to mass casualties, especially in such a fragile economic era.
Trevor Tezel
The government could invest the proceeds from the sale of pollution permits to firms in developing more sustainable/environmentally friendly machinery. If this was successful, it would provide a greater incentive for firms to upgrade their technology rather than pay for pollution permits, and would ultimately result in a decrease in toxic output.
The market for pollution permits is easier to implement than strict government control of the pollution of individual firms because of two reasons: first, it gives firms an incentive to take steps to improving environmental sustainability; this is because it will be cheaper to invest in new technology rather than buy the permits, and because they can sell unwanted permits for profit. Second, the creation of a market for pollution permits mean that demand and supply effectively control toxic waste output, thus requiring a lot less input in terms of time and money for the government. It also reduces the risk of firms engaging in illegal practices to circumvent strict legislation, such as dumping.
Without incentives, firms have no reason to reduce their negative externalities because they themselves are not harmed, at least not in a direct, measurable sense, by generating pollution. This is similar to the problem of the ‘Tragedy of the Commons’. Giving them incentives, which in this case are the profits that can be earned by selling extra permits, gives them a tangible value for changing their actions, and thus encourages them to invest in environmentally friendly technologies. The reason why this works is that humans are selfish beings and interested only in that which can benefit themselves directly; the provision of incentives to promote an environmental issue is therefore much better than legislation without any sort of motive.
With regards to your first suggestion, that governments could reduce their national debt, I think that this would be a good idea for America, as it is one of the world’s largest producers of pollution. It also refuses to sign anti-pollution legislature and can do so because of its size and economic power. Actually, I think that Obama has just started to introduce taxes on pollutants, although it remains to be seen whether this will develop into a pollutants market.
Revenue could be used for several different purposes. It would probably be most fitting; however, if the money was invested in researching and creating innovative “green” technology that would decrease pollution and protect the environment. “…billions can earned in revenue for the government, which in theory could be used to subsidize the research and development of pollution abatement technologies and “green energies” like wind and solar power.”
The implementation of pollution permits requires the creation of a commission, probably headed by the Energy Department of the nation undertaking the measure, to smartly allocate these permits and control prices. Businesses still have the freedom to make their decisions on the actions they want to take (although the system should be designed to where they will be encourage to pollute less). Under direct government control this possibility is not present. It chokes businesses who may not be able to make the quick and drastic shift necessary, closing many firms and creating a skyrocketing unemployment rate. This would be more detrimental to the overall economy.
A market for pollution permits creates more of an incentive to reduce emissions, rather than direct government control, because with the market there are choices for the firm to make. The firms do not have to accept the extra taxes placed on them by government, they can buy more permits, or buy ‘greener’ machines and reduce their pollution from the process. This choice, which the companies are free to make, provides an extra incentive in that the company can even make a revenue by selling their permits.
to leyre,
leyre, your answer is very good and well elaborated, although you could use more key point in the second answer.
laura
Meiling,
Very good post. You seem to have a pretty impressive grasp on the issue. There is one thing that struck me as interesting. You mention how governments could reinvest the funds from this into “sustainable/environmentally friendly machinery.” Would this be investment directly into the private sector, or in government manufacturing procedures? I think it is a very plausible and helpful prospect that should seriously be considered. There are many options, though, and I think that any extra revenue earned must be dealt with in a frugal and wise manner.
Trevor Tezel
1. The government could use the revenue gained from the sale of pollution permits to invest in research and development of new technologies to help eliminate the need to pollute in the first place.
2. A market for pollution permits is easier to implement because there is no need for a large bureaucratic control office to administer and insure efficacy of the government action. The government simply administers the permits, takes in the revenue, and allows the market to handle the rest.
3. The importance of incentives in achieving the reduction of negative externalities is that the producer is not interested in reducing the externality because they do not affect him directly, thus there must be some sort of incentive to influence the firm to stop polluting. A market for pollution permits gives the firms a greater incentive than direct government controls because the firm can at least make a profit off of the permits by reducing emissions and selling their permits.
-Dennis-
Hey Trevor,
I almost wrote what you did for the third question, that direct government control provided greater incentive, but I wasn’t sure whether being forced into something counts as incentive, so I went with the pollution permits because I know that they provide the firms with an incentive. If you know what you’re talking about, it would be cool if you could explain to me just how direct government controls are actually an incentive, I’m not sure. Anyhow, thanks, and good response.
-Dennis-
• Governments could invest the revenue earned from the sale of pollution permits to firms that were researching new “green” energy techniques that might one day help industries to not hurt the environment as they produce.
• The market for pollution permits is easier to implement that strict government controls because the permits are universal. Also, this does not require the establishment of a whole new bureaucracy, but rather builds on the power of existing firms.
• It is important to create incentives surrounding negative externalities as they tend to be overproduced. This is because they harm society, not private businesses, and so businesses are unlikely to work to avoid them as they will not offer enough gain.
• A market for pollution permits creates more of an incentive for reducing emissions as firms may actually make a profit by selling unused permits.
Chamonix
Trevor,
Excellent response!
I disagree on one point. I think that pollution permits might give more incentive to cut down on pollution than government limits. Legislation could cause MORE pollution being halted–say, in a full ban. However, government limits basically send the message “Don’t pollute or we shut you down.” Permits give the message “Don’t pollute or we shut you down–but if you’re good you can make a profit.” I think of it in terms of psychology. permits are both negative reinforcement (punishment for bad behavior) and positive reinforcement (rewards for good behavior).
Thanks for the great post!
Chamonix
1.) Governments could invest the revenue earned from the sales of pollution permits in, for example, developing new ways of alternative energy (research and development). This would not only encourage individual firms to pollute less, it would also encourage them to produce cleaner, more sustainable forms of energy for the future.
2.) Pollution permits would be easier to implement than strict government controls. The permits would not affect firms as negatively as strict government controls would. The reason behind this statement is that government controls would take away freedom from individual businesses, whereas permits would retain individual rights. As a result, business owners would probably be much more content with receiving permits than they would be with receiving government controls.
3.) For many firms, the most important incentive is profit. As a result, since reducing pollution emissions does not necessarily give an additional profit, it is undesirable to individual firms. Negative externalities are just what they sound like – negative for people and the general wellbeing of the society. For this reason, since companies will not necessarily work by themselves to eliminate negative externalities, they need an incentive to do so. A market for pollution permits creates a greater incentive to reduce emissions than direct government controls do. This is because firms can still make a profit through selling their permits, whereas government control would not yield a profit.
- Catherine
Hey Mattea,
In your third point, you talk about how firms must have a financial incentive to reduce their emissions. I definitely agree with you here. For the first question, you point out that the revenue from permits may be used to encourage firms to upgrade technology. I think your first and third points go hand in hand. If technology was upgraded because of the revenue from permits, it would probably be more efficient/cheaper to operate than the old machinery. Therefore, this, in itself, could give firms the incentive to reduce their pollution. If operation costs were cheaper, everyone would benefit – society and individual firms.
- Catherine
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
The government could invest the revenue earned from the sale of pollution permits in green energy. Money could be allocated to fund wind, solar, and hydro-electricity energy projects. The government could also invest the revenue in making infrastructure “greener” and in instituting more broad based recycling reforms.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
A market for pollution permits is easier to implement than strict government control of the pollution of individual firms because the government doesn’t have to perform the difficult task of keeping track of the pollution that the firms produce and making sure that they adhere to the rules set in place. The market based solution means that all that the government would have to keep track of was the number of permits on the market and the average price to make sure that the system was functioning properly. Market forces would take care of the rest.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
Incentives are important in achieving the reduction of negative externalities because they are the way to get firms to cooperate. The market for pollution permits creates a greater incentive to reduce emissions than government control, because not only do firms have to take into account the cost of permits when they calculate their average costs, but the reduction of pollution provides firms with a a way to generate extra revenue by selling unneeded permits.
-Issa
Hello Catherine,
I like your explanation of the incentives. You really made the reason why a market for pollution permits would be more desirable for firms than direct government intervention.The negative externalites of the firms actions don’t directly affect the firms and therefore do not factor into the firms’ costs. The externalites affect others. By using the market based solution of pollution permits, the government is forcing the firms to consider the externalities when they consider their costs and are thus causing them to internalize the externalities. That is way more effective than direct government intervention ever could be because it causes the firms to rethink their actions and not just try to “trick the system”
-Issa
1) A government could invest the revenue into research into new machines that don’t produce as much pollution so the need for pollution permits would decrease as well. They could also invest in fixing what the damage that pollution has done so far, like cleaning polluted waters, or helping to reforest deforestated areas.
2) A market for pollution permits is easier to implement because it gives firms incentive to produce less pollution, since buying the pollution permits will cost a lot more than just keeping their toxic emissions low. It also creates profit for the government who can then invest in pollution mitigation.
3)I think incentives in achieving reduction of negative externalities such as the environment pollution and global warming are very important. It is important that we become aware of these issues and try to solve them. However, I think government controls create more incentives towards a world free of pollution.
Issa,
I think that your point about incentive decreasing negative externalities is correct and makes sense. The marke for pollution permits does increase the need to create less emissions because then the firms would have to spend money on buying permits. Lowering emissions has a lower cost in the long run than constantly buying permission permits.
Sara
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
I believe it is through improving the alternative ways of energy, which do not pollute the environment through their production; this could be through building more wind farms and selling them at lower prices, or improving the technology or solar panels.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
A market for pollution permits only needs to create the permits and sell them in the open market. However, strict government control needs to measure precisely how much pollution is being made, look at the specific cost of pollution to society, calculate the necessary taxes or fines, so that they are not too high or too low, and needs to have the power to enforce the new laws.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls? What firms only care about are profits; if they do not see any interest, or profit, in reducing their pollution, they just will not; however, if reducing the pollution actually brings them profit, they will indeed consider doing so. Direct government control does not give any incentive: it is only a pathetic threat which is rarely enforced. However, the market for pollution rights indeed gives firms the possibility of increasing their revenues, since, after investing in ‘green’ ways of producing, they can earn profits through the unnecessary permits.
Leyre
When you said to use the money to ‘change their habits to more friendly ways of producing towards the environment,’ the first thing that came to my mind was bribing. Do you intend to bribe the polluters? I do not think that is a very good idea. You could instead make it a bit more subtle and give rewards to those who pollute the least… Or something of the sort which looks less illegal… And I still wonder how can strict government controls provide more incentives than the market for pollution rights… Did you mean that these controls make firms get scared, and thus an incentive to reduce pollution… Yes, that could be…
1. It is very interesting how this whole marketing pollution rights works. In this way he “commons” in the tragedy of the commons becomes privatized, and companies are forced to take responsibility for their pollution which is being dumped into the atmosphere.
2. A market is easier to implement than strict government control because the firms are going to respond better the market approach as the firms will have the incentive to lower their costs and only pollute when necessary. This will also be beneficial to the government as they will gain the revenues from the pollution permits.
3. What is the importance of incentives in achieving reduction of negative externalities? Does a market for pollution permits create more or less of an incentive to reduce emissions than direct government controls?
If companies do not receive an incentive when they reduce the negative externalities, they would not do it, this is because these externalities do not affect to the market and in a marginal analysis: there is no benefit and a big cost in reducing these negative externalities. Markets for pollution permits is the best way to incentive the firms because it affects on the law of supply and demand of the product.
meiling,
i defently agree with your answer; i had thought about answering similarly for question 3; although i think you should use more examples.
karen
1. What are some ways a government could invest the revenue earned from the sale of pollution permits to firms?
I think revenue could be used to improve a countries infrastructure, and primarily the development of alternative ways of energy, or fund science research into new forms of energy. Also possibly give benefits to people who use Green energy, or implement a system where lower taxes are given to people who use more environmentally friendly energy.
2. Why is a market for pollution permits easier to implement than strict government control of the pollution of individual firms?
Pollution permits are alot better, as they but a immediate limit on how much pollution is allowed, where as putting tax on the amount of pollution produced doesn’t enforce the policy of trying to reduce carbon emissions. Pollution permits are alot more efficient to implement where as calculating how much pollution is produced and then tax and work out all the costs.
What is the importance of incentives in achieving reduction of negative externalities?
Incentives could encourage large emitting factories to switch over, they would be more likely to do so if it gave them a profit of course. As Marcelo said setting up a direct government control does not give them any incentive to switch, and is just a mere threat. In general people will do things if they like the benefits they are given, or when told to do something they are less likely to do it as there might not be as much gain out of it. Once again the us humans work.
1) The government can gain a a higher profit for the development of machines that reduce pollution and also invest in programs and other things to prevent and fix the damage of pollution to the environment.
2) A market for pollution allows less pollution, since these have high prices and creates a revenue for the government.
3) The goal of reducing pollution is essential for the best of the environment and to maintain resources.
Leyre,
I don’t really understand about ‘change their habits to more friendly ways of producing towards the environment,’ but the main purpose if all this is to reduce the pollution and as Marcelo said bribing is not the solution, the government and the environment will be harmed.