Question

What are market-based methods to pollution control are options to solve negative externalities of fossil fuel use? How would those methods work and how can we ensure that they function correctly?

Answer 1

Some of the market based methods to pollution control and how they work are-

• The Emission tax: An emission tax is implemented per unit of pollution emitted and forces a firm or consumer to internalize the external cost of its emission. The polluter pays the value of marginal external damage caused by that unit of pollution.
• Environmental subsidies: To encourage the use of cleaner fuel source by subsidizing the additional cost. However the subsidy distorts long run economic incentives of firms.
• Tax and subsidy combine: A tax and subsidy also can be combined to achieve an efficient level of pollution. The tax increases the cost of output and induces the firm to reduce its use of both clean and dirty inputs while subsidy provides the firm with an incentive to switch into cleaner forms of fuel.

Monitoring and enforcement:

                Effective monitoring and enforcement is a basic requisite for pollution control policy. Implementation of policies need detail data of emissions for monitoring and enforcement.

In addition, the number of audits and penalty plays a significant role in monitoring and effective usage of the policy.

Enforcing of proper market instruments requires proper measurement of emissions as well as effectively established fines and regular monitoring.