Trade Pollution Permits

Question 1

What is a pollution cap

Answer 1

A pollution cap is a limit put on the amount of emissions firms are allowed to emit in a year

Question 2

Where is this pollution cap set

Answer 2

At the social optimum point of pollution

Question 3

What does the government do after the cap is set

Answer 3

The government allocates permits (free or at a charge) which allow firms to pollute up to this limit. These permits are tradeable

Question 4

What effect does this have on firms (trade pollution permits)

Answer 4

• Firms emissions are monitored, so firms who emit under the cap are able to sell their excess permits -> allow for profits
• firms who emit above the cap will be fiend and have to buy extra permits -> increase costs

Question 5

What effect does these permits have on firms decisions

Answer 5

Firms have decisions to make they can either;
- invest in greener technology
- or buy more permits

Question 6

What effect does the trade pollution permits have

Answer 6

The externality is internalised so firms pay the costs of the societal costs of pollution

Question 7

What benefits does this policy have

Answer 7

• decreases pollution levels so negative externality is minimised
• incentivises investments into green technology
• incentivises being greener as it allows permits to be sold -> increase profits
• government can increase revenue by charging firms for permits
• leaner firms benefit and less environmental firemdly firms suffer

Question 8

How does the permits incentivise greener technology investment in the long run

Answer 8

• firms will save permits which allows them to be sold for a profit
• they are not burdened in the future If permit prices increase

Question 9

How do cleaner firms benefit and less clean suffer

Answer 9

Cleaner firms do not have to buy permits and can sell permits for a profit
- less clean age to buy more permits which increases costs of production for the firm

Question 10

What are some cons of this policy

Answer 10

• enforcement of this policy is expensive and cannot be afforded in ledcs, give me et stay nto have sufficient technology to measure emissions accurately-> policy si ntk as effective
• imperfect information -> governments may not know where the social optimum is which can lead to insufficient permits allocated or tooc loose
• unintended consequences
• needs international co operation

Question 11

What are some unintended consequences of this policy

Answer 11

• increase the costs of production for firms -> can lead to them passing on higher prices to consumers
• firms may leave the industry -> less choice
• may leave for other countries
• lower consumer welfare
• pressure to cut costs may lead to unemployment

Question 12

Why is international co operation needed

Answer 12

International co operation is needed as pollution is a worldwide probelm so co operation form all countries is needed to make a difference
- many countries are reluctant to increase costs of production -> ledcs going through industrialisation who want to increase economic growth
- do not want to decrease economic competiveness