Question

define the efficient allocation of pollution and market allocation. give examples of efficient policies.

Answer 1

Pollution creates negative externality as the private cost is less than social cost. So firms emit more pollution than socially desirable level. Government intervention helps to curb the pollution level from the environment. There are two policies to curb the pollution level, 1)tradable pollution permit 2) pollution tax

tradable pollutin permit: In this case government gives firms a legal right to pollute a certain amount.Firms that pollute less can sell their leftover pollution permit to the firms that pollute more. Tradable pollution permit is a cost-effective way to achieve a reduction in overall pollution. For an example steel industry emits more pollution than textile industry. Steel industry gets the permit to pollute 15 units and textile industry get 10 unit pollution permit. If textile industry need 5 unit pollution permit, it can sell leftover 5 unit permit to steel industry so that steel industry can pollute 20 unit

Pollution tax: In this case, the government imposes a certain amount of tax on pollution which gives the industries to pollute less because of increasing cost. For an example, the government imposes 5% tax on pollution. It will increase the private cost of polluting the market level of pollution decreases. But the industries which pollute more can pay more taxes and pollute. So government sometimes fail to decrease the pollution at the desirable level by pollution tax.