Question

Explain the pros and cons of using taxes versus marketable permit systems to achieve a given level of pollution.

Answer 1

Answer: Following are the pros and cons of marketable permit:

PROS

• In marketable permit the pollution level is set and an increase in pollution in one area will lead to a decrease in the pollution in some other area.

• It promotes efficiency as firms find new ways to produce and thus is considered better than levying taxes on pollution.

• In this method there is more certainity as to reduction in pollution as mew and better means to produce goods is developed and which leads to lower rate of pollution.

CONS

• This type of pollution controlling technique is considered to be more expensive and leads to higher administration costs.

• It can affect the competition situation in a particular area which is not good for the economy as a whole.

• This method can lead to distortions in the geographical areas as one area would have more pollution level and the other will have less.

Following are the pros and cons of taxes on pollution:

PROS

• It makes the firms follow a principle of polluter pays principle and thus more polluting the firm more will be the texes imposed.

• In this method the firms are bound to reduce the pollution level as otherwise they will end up paying taxes and of they don’t polluting then it will make their production level rise which will eventually reduce the profit level.

• The revenue collected theough this can be used to promotes campaigns to stop polluting or any other economic benefit.

Cons

• It can be difficult to measure the amount of tax to be imposed as it is not practically possible to measure the polluting level.

• It will also lead to high administration costs as a maintenance authority will be needed to oversee the pollution level of firms.

• It somewhat gives the firms a license to pollute as big firms have enough moeny to pay for such taxes and this will not help in reducing the pollution level at all.