Negative externality of production by Harry, Edward and Rain

Negative externality of production by Harry, Edward and Rain

1. Remedies

   • Supply
     • Market-based solution
       • Imposing taxes (ie IBM laptops releasing pollutants into the air)
         • PROS
           • Reducing the amount of well fare loss, increasing revenue for government to use it in public goods
         • CONS
           • Difficult to measure the pollution created accurately and to put a value on it
           • Difficult to identify which firms are polluting and to what extent each firm is responsible for the pollution.
           • Taxes do not stop the actual pollution
       • Tradeable pollution permits (Cap and Trade system)
         • Licences to pollute a specific amount that the government allocates to polluting firms that are tradable in the open market.
           • PROS
             • The limit of pollution is set
             • Incentive to create more green and efficient firms
             • Loss of output is smaller than if the government splits the total level of pollution up into same amount for all firms.
           • CONS
             • not reduce pollution
             • difficulty in determining the initial allocation of permits
     • Command-and-control solutions
       • Ban or restrict output of the poducts
         • Cons
           • Unemployment
           • Non-consumption of valuable products
         • Pros
           • Reduce pollution
   • Demand
     • Advertising, or moral suasion, education

2. Market failure

   • Problems?
     • Lower price, more quantity
       • Over-consumption and over-supply
         • Inefficient allocation of resources
   • Effect?
     • Threats to Sustainability
     • Welfare Loss

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