2.2.3

Pollution Permits & Regulation

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Tradable Pollution Permits

Trade pollution permits are allocated to businesses in an attempt to control pollution levels.

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What are permits?

  • Governments can set an optimal limit on pollution by allocating permits to firms.
  • These permits can be traded through the price mechanism.
    • The European Union emissions trading system (ETS) is a way to do this. EU member governments are issued with permits to allocate to firms.
  • The ETS annually cuts the number of permits. This incentivises firms to reduce emissions because they may be forced to buy more permits for not doing so.
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Benefits of trade pollution permits

  • This system can put a cap on the level of pollution.
  • The lower the pollution of a firm, the more they can benefit. This encourages firms to lower their pollution levels.
  • Governments make revenue.
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Disadvantages of trade pollution permits

  • There is a cost to implementing the scheme.
  • Deciding on the level of pollution is difficult.
  • The market for permits is subject to failure also.

Regulation and Deregulation

Regulation involves setting rules that firms must comply with. These rules are imposed by the government to try and correct market failures. Deregulation is a loosening of these rules.

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Benefits of regulation

  • Regulation can correct market failures that arise from externalities.
    • E.g regulation can be imposed to limit the level of pollution firms make.
  • Regulation can control monopolies and stop them from taking advantage of customers and reducing welfare.
  • Legislation provides a means of punishing firms for their anti-competitive behaviour.
  • Regulation can be used to protect the environment.
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Costs of regulation

  • It's hard to know which industries to regulate, and how to regulate them. This often needs a value judgement.
    • E.g what level does the government set for firm pollution? Why that particular level?
  • It can be expensive to monitor firms to enforce regulation, and there is an opportunity cost attached to this.
  • It can be expensive to follow regulations. Some firms may end up closing down or relocating because of high costs.
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Benefits of deregulation

  • The allocation of resources will improve as the government will reduce their interference with the free market.
  • By reducing the bureaucracy associated with legislation, efficiency will improve.
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Costs of deregulation

  • Customers are no longer protected from the anti-competitive behaviour of firms and might lose out.
  • There are some market failures it cannot fix, such as the problem with externalities.
    • E.g deregulation of industries may lead to an increase in pollution because of the tragedy of the commons.
  • Some natural monopolies need regulation.
    • E.g sewage services.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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