Question

Please find 2 articles on Market Failure (Cap and Trade, Green Credits).

Do an Economic Analysis (see below for format)

I. Summary ( couple sentences)

II. Economic Analysis (1-2 paragraph)

a. explain possible outcomes of policies you encountered

b. is this a good way to control market failure and why

*I dont care if you agree or disagree with the article or the policies, as long as you back it up with your own thoughts.**

Answer 1

Market failure occurs when social costs will not match social benefits. A polluting factory creates more social costs due to pollution than social benefits. It leads to overproduction at lower costs for producers. In the figure below, it is clear that marginal private cost is less than marginal social costs and output in the market (Qm) is more than social optimum(Qopt).

Environmental pollution can be reduced by government regulations and a market based policies which have carbon trade and imposing carbon tax on polluting industries.

Government regulations involve legislations like limiting output by each firm, forcing polluting firms to install pollution reducing technologies.

Market based policies involve imposing a tax on output or tax on number of pollutants. Cap and trade scheme also be introduced in which a less polluting firm can sell its balance carbon credits to polluting firm.

As shown in the. diagram below by imposing a tax, a product can be made to raise price from Pm to Popt and its output will also decrease from Qm to Qopt.

In case of tradable permits , any firm that keeps pollution under permissible limits will get permits to sell and as demand for permits increase its prices will also go up.

As demand for tradable permits goes up, it will be sold at higher prices and firms polluting less will be incentivised more.Permits helps internalising this externality and a better way than tax as forms can pass on tax burden on consumers.

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