1.4.1 government intervention

what is a “tradable pollution permit”

is a form of pollution control that uses the market mechanism to insentivise producers and consumers to reduce their total carbon emissions

why does a pollution permit incentivise firms to cut carbon emmision

the price of the pollution permit increases, meaning the cost of production increases = firms incenticised to use cleaner technology

draw a pollution permit

increasing the scarcity of a pollution permit only increases prices

this makes it more expensive for a business to emit carbon

perfectly inelastic supply = fixed amount of permits

how does a pollution permit effect the negative externality of pollution

pollution permits internalises the cost to third parties. Producers are paying more for the pollution permit due to the damages done to the environment. COP increases. Price increases to the socially optimum level at P* and quantity decreases to the socially optimum output of Q*.

EV - Without the pollution permit, firm operate at P1 Q1 which is not socially optimal, this causes DWL

EVALUTAION ON POLLUTION PERMIT

it is difficult to measure the pollution levels. Multinationals shift production around due to globalisation

Difficult to know how many pollution permits that is given out by the government

what is state provision of public goods + examples

information gaps can cause market failure, governments may directly provide and fund information campings to help inform decision making 

• lifestyle campaign 

advantages + disadvantages of information provision

ADV - doesn’t interfere with the market mechanism allowing market forces to determine market price and quantity

DIS - consumer behaviour doesn’t change - consumers may choose to ignore information or may not understand

EVALUTAION of information provision

EV

if consumers act rationally or irrationally

the size of the information gap - consumers may already know information without it being provides = ignore

what is regulation

government creating rules to limit the harm of negative externalities of consumtion or production,

Advantages and disadvantages of regulations

ADV - overcome information failure by making an activity compulsory

fail to meet regulation = fine = compensation = internalise the externality

DIS - may have knock on effects on industries = job losses

potential3 for informal economy or shadow market to aviod the law