POLLUTION PERMITS/PROPRTY RIGHTS

Question 1

Process Pollution Permit Creation

Answer 1

• Gov’t set Pollution Cap (at socially optimal level)
• Premits that match the cap (fixed amount) are issued to firms
• Firms polluting in excess of cap can either invest in Green Tech to reduce Pollution OR Buy spare permits and ‘pay to pollute’ which internalises the externality
• When enforced, Pollution falls to the social optimum causing allocative efficiency

Question 2

Advantages of Pollution Permits

Answer 2

• Creates Long Term incentive to invest in Green Tech
  — Allows firms to protect and make more profit by not having to buy permits and selling spare ones
  — Firms who have invested in Green Tech won’t be burdened by inevitable permit prices rises

Question 3

Disadvantages/Evaluation of Pollution Permits

Answer 3

• Can be hard to enforce especially for developing countries; costly and requires specialist tech to monitor emissions
• Gov’t have imperfect info about social optimum so may be set too tight/loose; Gov’t Failure
• Potential for unintended consequences due to increased CofP
• Need for international cooperation as pollution is a global issue; hard to get due to cost-increasing nature of permits

Question 4

Potential unintended consequences of Pollution Permits

Answer 4

• Business shutting down due to inability to afford permits
• Firms leaving the country and polluting elsewhere; ‘Carbon Leakages’
• Increased costs passed onto consumers through higher prices - Inflation

Question 5

Effect of Property Rights

Answer 5

• Can decrease “Tragedy of the Commons”
• Makes common resources now act as private goods

Question 6

Explanation of Effect of one owning a Property Right

Answer 6

• Incentive is now to preserve and look after resource rather than exploit it
• Internalises Negative Externalities as the impact/burden of exploitation will be on the exploiter (owner) themselves
• If enforced well (e.g. fines for use without permission), will reduce quantity used to the socially optimal level

Question 7

Evaluation of Property Rights

Answer 7

• Can certain property rights actually be distributed? E.g. Air, sea
  are hard/ impossible to allocate
• Resource may not stay in one place E. g. Fish
• Enforcement needed in order to be truly successful but it is costly to police it.
• Equity - can be hard to allocate certain resources equitably