Question

The government decides to address negative pollution externalities in a given market by issuing and selling a fixed value of pollution permits. In other words, firms need to pay for the right to pollute by purchasing these permits. Describe what will happen to the price of permits (and why) under each of the following scenarios. Be sure to illustrate your answers with the appropriate graphs depicting any changes taking place in the permits market.

a) The government decides to allow for more pollution by increasing the number of permits issued.

b) New technologies emerge making it easier (and cheaper) to produce while generating less pollution.

c) The economy undergoes a strong expansion and demand for commodities rises as a result.

Answer 1

a) 1) Pollution permits involve giving firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year.

2) If the firm produces less pollution it can sell its pollution permits to other firms.

3) However, if it produces more pollution it has to buy permits from other firms or the government.

4) This creates a market for pollution permits with the price set by demand and supply.

5) The aim of pollution permits is to provide market incentives for firms to reduce pollution and reduce the external costs associated with it. For example, it is argued carbon dioxide emissions contribute towards global warming.

6) Pollution permits can also be a way for the government to raise revenue, by selling firms these permits to allow pollution.

DIAGRAM FOR POLLUTION PERMITS WITH INCREASED DEMAND

A very simple diagram showing the fixed supply of pollution permits. Suppose there is rapid economic growth and the demand for producing pollution increases, the cost of tradeable permits rises from P1 to P2.

Pollution permit scheme with cut in supply of permits

In this case, the government reduces the number of permits over time. This means the price will steadily increase and create a growing incentive to reduce pollution over time. The idea is that it gives firms time to try and invest in different technology which creates less pollution.

Permits reducing demand over time

Over time, the existence of pollution permits should reduce demand for pollution. Firms wish to avoid paying the cost and find a way to reduce pollution. As demand for permits falls, the price of permits will fall.

In this case of falling price of permits, it may be necessary for the government to respond by steadily reducing the supply of permits. By steadily reducing the amount of permits, the government can steadily reduce the quantity of pollution.

b) Some technologies are important for helping other technologies reduce pollution. For example, process controls such as meters and sensors can make many production processes more efficient and less polluting by providing improved control, which reduces waste and defects.

A pollution prevention (P2) technology is one that creates less pollution in its life cycle than the one it replaces. P2 can be achieved in many ways, from better housekeeping and maintenance to redesign of products and processes. The range of P2 technologies is therefore very broad. It includes relatively cleaner technologies, technologies that help other technologies to be cleaner, and certain mass-market technologies. All of them reduce environmental impacts compared to their alternatives. It is important to understand that P2 technology does not include pollution-control or -treatment technologies that do not make the technology producing the pollution any cleaner itself. They just manage the resulting waste

Relatively Cleaner Technologies

Technology is always advancing and improving. Many new technologies are naturally more energy efficient and less polluting than the ones they replace. Sometimes, this is because they were designed with environmental improvement in mind. Usually, however, it is simply the result of using newer and better materials and components. Therefore, pollution-preventing technologies can be found in every area of a product's life cycle.

Life cycle analysis (LCA) is needed to determine if a particular technology really pollutes less than its alternatives. LCA is the examination of the environmental impacts of a product, from its origins as raw material through processing and production to use and final disposal. This can be a complex process. For example, fluorescent light bulbs may seem to be less polluting than incandescent light bulbs because they use much less energy. However, they actually use polluting chemicals such as mercury that are not found in incandescent light bulbs. So they use less energy, but more toxic chemicals. The choice of indicators for P2 performance and LCA, such as toxicity or energy efficiency, is important for evaluation.

Relatively Cleaner Technologies

Technology is always advancing and improving. Many new technologies are naturally more energy efficient and less polluting than the ones they replace. Sometimes, this is because they were designed with environmental improvement in mind. Usually, however, it is simply the result of using newer and better materials and components. Therefore, pollution-preventing technologies can be found in every area of a product's life cycle.

Life cycle analysis (LCA) is needed to determine if a particular technology really pollutes less than its alternatives. LCA is the examination of the environmental impacts of a product, from its origins as raw material through processing and production to use and final disposal. This can be a complex process. For example, fluorescent light bulbs may seem to be less polluting than incandescent light bulbs because they use much less energy. However, they actually use polluting chemicals such as mercury that are not found in incandescent light bulbs. So they use less energy, but more toxic chemicals. The choice of indicators for P2 performance and LCA, such as toxicity or energy efficiency, is important for evaluation.

Facilitative Technologies

Some technologies are important for helping other technologies reduce pollution. For example, process controls such as meters and sensors can make many production processes more efficient and less polluting by providing improved control, which reduces waste and defects. Centrifuges can reduce the amount of solids in wastewaters, thereby reducing water pollution. Catalytic converters on engine exhaust systems can reduce air pollution. There are many such examples of technologies that help other technologies be cleaner. This is important in situations where there is a large investment in an existing technology already installed that cannot be easily or economically replaced with new and cleaner technology.

Mass-Market P2 Technologies

Mass-market P2 technologies are those that can be used in many different industries or even in consumer households. These technologies create new markets because their production creates jobs and spin-offs, and they generate ready demand from producers who want to reduce input costs. Each has the following criteria:

1. The technology is widely applicable across a variety of industry types and sizes.
2. The technology does not require very large capital expenditures.
3. The technology's usefulness has been proven through years of implementation experience.
4. The technology has demonstrated free-market feasibility, that is, a positive payback in the productivity of materials, not including reductions in disposal costs.
5. The technology can be supported in the field by local technicians with basic competence.
6. Parts for repair are locally available at reasonable cost.

Example mass-market technologies for P2 include household water-conservation fixtures, variable-speed motors, programmable heating and air conditioning controls, citrus-based solvent cleaners, plastic films for reducing heat transmission through windows, and many others.

International P2 Technologies

The major differences in P2 technologies among countries lie in the age of the technology and the level of process control. In less developed countries, much of the technology is old and would be considered out of date and uncompetitive in developed countries. Consequently, it usually produces much more pollution per unit of output. Less developed countries also tend to use fewer process controls and instrumentation. Much of the operation is controlled by hand or based on experience, rather than real-time data. Human error thus potentially creates more waste and pollution in such situations. But there are no hard and fast rules for differences in P2 technologies between countries. In Thailand, for example, there has been significant investment in new factories in the electronics and auto parts industries. These plants use the latest technology and management practices and are much less polluting than older plants in the same industries operating nearby.

c) An economic expansion is an increase in the level of economic activity, and of the goods and services available. It is a period of economic growth as measured by a rise in real GDP. The explanation of fluctuations in aggregate economic activity between economic expansions and contractions is one of the primary concerns of macroeconomics.

Typically an economic expansion is marked by an upturn in production and utilization of resources. Economic recovery and prosperity are two successive phases of expansion. Expansion may be caused by factors external to the economy, such as weather conditions or technical change, or by factors internal to the economy, such as fiscal policies, monetary policies, the availability of credit, interest rates, regulatory policies or other impacts on producer incentives. Global conditions may influence the levels of economic activity in various countries.

Economic contraction and expansion relate to the overall output of all goods and services, while the terms inflation and deflation refer to increasing and decreasing prices of commodities, goods and services in relation to the value of money.

Expansion means enlarging the scale of a company. The ways of expansion include internal expansion and integration. Internal expansion means a company enlarges its scale through opening branches, inventing new products, or developing new businesses. Integration means a company enlarges its scale through taking over or merging with other companies.

DEMAND FOR COMMODITY

The demand for a commodity is the amount of it that a consumer will purchase or will be ready to take off from the market at various given prices in a period of time. This, demand in economics implies both the desire to purchase and the ability to pay for a good.

Factors which Determine the Demand for Goods

1.Tastes and Preferences of the Consumers: ...

2.Incomes of the People: ...

3.Changes in the Prices of the Related Goods: ...

4.The Number of Consumers in the Market: ...

5.Changes in Propensity to Consume: ...

6.Consumers' Expectations with regard to Future Prices: ...

7.Income Distribution:

The greater the utility he expects from a commodity, the greater his desire for that commodity. It should be noted that no question of ethics or morality is involved in the use of the word ‘utility’ in economics. The commod­ity may not be useful in the ordinary sense of the term even then it may provide utility to some people.

For instance, alcohol may actually harm a person but it possesses utility for a person whose want it satisfies. Thus, the desire for alcohol may be considered immoral by some people but no such meaning is conveyed in the economic sense of the term. Thus, in economics, the concept of utility is ethically neutral.