TK6 Policy Instruments for Pollution Control (II)

Question 1

Environmental Taxes

Answer 1

Impose a tax of £t for each unit of pollutant emissions.

Question 2

Pigouvian tax definition

Answer 2

• A Pigovian tax is a tax imposed on an activity that generates negative externalities, set equal to the marginal external cost at the socially optimal level of activity, to correct the market outcome and achieve economic efficiency

Question 3

Environmental Subsidies

Answer 3

Pay a subsidy of £s for each unit of pollutant abatement

Question 4

Comparing Taxes and Subsidies in the short run

Answer 4

• Both taxes and subsidies result in the same individual and aggregate
  abatement, if t=s.
• Net payment/revenue for the regulator and polluters will differ as seen
  above.

Question 5

Comparing Taxes and Subsidies in the long run

Answer 5

• In the long run in which polluters can enter/exit
• Subsidies may result in more aggregate pollution than taxes because
  subsidies likely keep/attract more polluting firms into the industry, as
  compared to taxes.

Question 6

Economic Incentives

Answer 6

• Fees (taxes and subsidies)
• Marketable (tradable) permits (cap-and-trade)
• Liability

Question 7

Marketable (Tradable) Permits (Cap-and-Trade)

Answer 7

• The government issues a fixed number of pollution permits.
• Firms can buy or sell permits based on their abatement costs.
• Trading permits minimizes overall compliance costs.
• The system ensures total pollution stays within a set limit.

Question 8

liabillity

Answer 8

• Firms are legally responsible for environmental damages.
• Liability creates incentives to reduce harmful activities.
• Firms act upfront to avoid lawsuits and penaltie