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To see how marketable permits can work to reduce pollution, consider the four firms listed in [link] . The table shows current emissions of lead from each firm. At the start of the marketable permit program, each firm receives permits to allow this level of pollution. However, these permits are shrinkable, and next year the permits allow the firms to emit only half as much pollution. Let’s say that in a year, Firm Gamma finds it easy and cheap to reduce emissions from 600 tons of lead to 200 tons, which means that it has permits that it is not using that allow emitting 100 tons of lead. Firm Beta reduces its lead pollution from 400 tons to 200 tons, so it does not need to buy any permits, and it does not have any extra permits to sell. However, although Firm Alpha can easily reduce pollution from 200 tons to 150 tons, it finds that it is cheaper to purchase permits from Gamma rather than to reduce its own emissions to 100. Meanwhile, Firm Delta did not even exist in the first period, so the only way it can start production is to purchase permits to emit 50 tons of lead.

The total quantity of pollution will decline. But the buying and selling of the marketable permits will determine exactly which firms reduce pollution and by how much. With a system of marketable permits, the firms that find it least expensive to do so will reduce pollution the most.

How marketable permits work
Firm Alpha Firm Beta Firm Gamma Firm Delta
Current emissions—permits distributed free for this amount 200 tons 400 tons 600 tons 0 tons
How much pollution will these permits allow in one year? 100 tons 200 tons 300 tons 0 tons
Actual emissions one year in the future 150 tons 200 tons 200 tons 50 tons
Buyer or seller of marketable permit? Buys permits for 50 tons Doesn’t buy or sell permits Sells permits for 100 tons Buys permits for 50 tons

Another application of marketable permits occurred when the Clean Air Act was amended in 1990. The revised law sought to reduce sulfur dioxide emissions from electric power plants to half of the 1980 levels out of concern that sulfur dioxide was causing acid rain, which harms forests as well as buildings. In this case, the marketable permits the federal government issued were free of charge (no pun intended) to electricity-generating plants across the country, especially those that were burning coal (which produces sulfur dioxide). These permits were of the “shrinkable” type; that is, the amount of pollution allowed by a given permit declined with time.

Better-defined property rights

A clarified and strengthened idea of property rights can also strike a balance between economic activity and pollution. Ronald Coase (1910–2013), who won the 1991 Nobel Prize in economics, offered a vivid illustration of an externality: a railroad track running beside a farmer’s field where the railroad locomotive sometimes gives off sparks and sets the field ablaze. Coase asked whose responsibility it was to address this spillover. Should the farmer be required to build a tall fence alongside the field to block the sparks? Or should the railroad be required to put some gadget on the locomotive’s smokestack to reduce the number of sparks?

Questions & Answers

what is balance of payment
Tih Reply
I don't know
Somkenechukwu
balance of payment is the sum total of a country receipt for her exports and the total payments made for her imports.
dajan
discuss collusion of An oligopoly
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money is everything
Pranav
a regulatory object between producer and consumer of monetary system
Vipul
money is anything generally accepted for the payment of goods and services and for the settlement of debt
Angel
a regulatory object of good and services between producer and consumer ( all these comes under monetary system)
Vipul
what is price surveillance?
Berry Reply
what is favourable balance of trade
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what is demand
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what are two classical macroeconomics and what're their theories say about their equations?
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what is elasticity of demand?
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Osanday
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SHERO
flexibility of demand in terms of price , income and tax ratio .
Vipul
Causes of economic growth
pierre Reply
What is elasticity of demand
pierre
What are the causes of economic growth
pierre
economic growth, establishment of industry, encourage of investor's, farm productivities, creation of institutions, construction of good road etc
Oyewale
elasticity of demand can be said to be the responsiveness of demand to a change in prices
fateemah
impact of collusion in the economy referring to inefficiencies illustrated by means of graph
nondumiso Reply
The Factor price will determine the choice of techniques to produce.Expantiate
dajan
what is elasticity of demand?
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state and explain two types of demand
Etta
Institution involved in money market
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Economic is the study of scarcity
Kolade
Economics is the study of a lot of things. It is split up into two areas of study, Microeconomics and Macroeconomics. Microeconomics is the study of an individual's choices in the economy and Macroeconomics is the study of the economy as a whole.
The
Economics is a science that studies human scarcity
Agnes
What is Equilibrium price?
Agnes
Equilibrium is the market clearing price. The point at which quantity demanded equals quantity supplied. The point at which the supply and demand curves intersect.
The
Equilibrium price*
The
Refers to the study of how producers use limited resources to satisfy human unlimited wants
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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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