Evaluate proposals for reducing environmental air pollution by energy E

Evaluate proposals for reducing environmental air pollution by energy tax revenue and emissions trading.Pollution is shitd as a by-product of output in most industries. Itcan be described as an external cost to the economy as its existencecauses a loss of welfare to the population as a whole, and, in a freemarket, this loss of welfare will generally go uncompensated. However, that does not mean that the optimum level of pollution iszero, contrary to the environmentalist presumption, as this would meanthat economical activity would have to be zero and this is illogical. Therefore, an optimum level of pollution and corresponding economicactivity has to be found. According to the Pareto efficient, theideal allocation of resources occurs when nobody can be made better aside without making someone else worse off. In the case of pollutionproduction, this can alike be defined as the point of production wherethe marginal fire private benefit (MNPB) of the polluter is equal tothe marginal external cost (MEC) as a whole, as shown on diagram 1, atthe level of economic activity Q*. The polluters total net privatebenefit from production is illustrated on diagram 1 as the area belowthe MNPB dilute and total external cost is the area below the MECcurve. Using this analysis, we can see that A is the largest area ofnet benefit available, thus confirming that Q* is the optimal level ofactivity. However, without regulation in this market it is likely thepolluter will continue to operate at Q to maximize their own privatebenefits, although this will create an unacceptable level of externalcosts. Therefore, the government faces several policy choices in orderto regulate pollution and keep it at an optimal l... ...mits arealso effective in lowering emissions, but only if they are auctionedoff and tradable in the market. If there is grandfathering (givingpermits only to established firms in the industry) or output groundallocation present then this would incur a greater cost t o the economythan auctioning off permits, thus increasing the optimum level ofemissions.Bibliography* Banzhaf, Burtraw & Palmer, Capping Emissions Where Efficiency and unexclusive Interest Intersect, Public Utilities fortnightly, 1st Dec 2002* Pearce & Turner, Economics of natural resources and the environment, Harvester Wheatsheaf, 1990* Pindyick & Rubinfeld, Microeconomics 2nd edition, Macmillan, 1992* Parry. I, Are Tradable Emissions Permits a Good Idea? Resources for the future Issue legal brief 02-33* DTI, Energy White Paper, TSO, Feb 2003* www.defra.gov.uk