Question

If the society wants zero pollution, most economic activities will not be possible. Therefore some societies agree upon a certain tolerable level of pollution at the society's level and then distribute that among people. Accordingly each person will be entitled to pollute the environment up to a certain amount. Some people however do not pollute the environment up to their allotted share while others need to pollute more than they are entitled to. As a result a market for these "rights to pollution" has been developed. Those who do not pollute as much as their shares allow will sell their rights to those who want to pollute more. Explain why pollution is not desirable by the society. Then predict what will happen in th market for "pollution rights" if the society becomes more conscious of the pollution and decides to reduce the acceptable level of pollution.

Answer 1

Pollution is the result of economic activities. Pollution causes damage to environment which is a cost to the society. Therefor pollution is a negative externality whose marginal cost to society is greater than marginal benefit. Economic production can result in pollution damaging environment. This tradeoff arises for all societies. Negative externality results in market inefficiency if proper action is not taken. It is true that zero pollution is not possible & if any society wants zero pollution, most economic activities will not be possible. Therefor pollution is not desirable by the society.

If economic aspect is not taken into consideration the socially optimal level of pollution will be zero because no pollution will result in no cost to society. Most of the societies agree upon a certain tolerable level of pollution at the society's level and then distribute that among people. As a result a market for these "rights to pollution" has been developed. Those who do not pollute as much as their shares allow will sell their rights to those who want to pollute more. This is a market oriented approach.

If society becomes more conscious of the pollution and decides to reduce the acceptable level of pollution, at high prices the demand for pollution rights decreases as individuals will either stop polluting or pollute less by acquiring pollution abatement equipment since pollution rights become expensive. The revenue from the sale of pollution rights decreases if demand for them is less. At low prices people will choose to buy permits rather than acquiring expensive equipment or upgrading to technology. The revenue from sale of pollution rights increases if demand for them is high.