Y1 32 Tradable pollution permits

Question 1

Tradable pollution permits chain of reasoning

Answer 1

Pollution cap set at social optimum level, permits issued across economy, firms make decisions based on lowest cost: invest in green tech or buy spare permits, internalises externality, pollution decreases to cap, LR green tech incentive

Question 2

Tradable pollution permit cons

Answer 2

Enforcement: Expensive, tech required to measure efficiently
Imperfect info: Cap may be too strict/lenient, gov. failure
Unintended consequences: Firm shut down, higher consumer price, cost burden
International cooperation: Some economies may not join due to higher producer costs