Question

Explain three methods government deals with the external costs from pollution?

Answer 1

The government mainly uses the following three methods for coping with the external costs from pollution:

1. Levying of taxes

To cope up with the external costs arising from pollution, the government can use its powers and levy tax which is called as Pigovian tax. This tax is levied/imposed equivalent to the marginal external cost.

When such tax is imposed, there is a shift of the private supply curve which is the same as MSC (Marginal Social Cost Curve).

2. Emission charges

Emission charge is a price which is charged by the government as per an unit of pollution that the polluter pollutes and the polluter has to pay the charge imposed by the government.

The drawback of this method is that it is difficult to determine exactly what should be the price per unit of pollution.

3. Marketable permits

Marketable permits allows a polluter to pollute at a certain limit. Here, a limit on pollution is put.

Here, in cases where a polluter has excess pollution to be polluted left with him, he can sell this “excess” to firms who need it. Then, these firms do not require to reduce the pollution caused by them as per this amount.

The advantage of marketable permits is at providing a sharp incentive for finding technologies which are reducing the amount of pollution. They  lower the cost of compliance, ease the burdens of administration, and provide incentives for innovation.