What policies can a government use to reduce pollution?
Pollution is a negative externality – a cost to society. To reduce pollution, the government can use four main policies – tax to raise the price, subsidise alternatives, regulations to ban certain pollutants and pollution permits.
Government policies to reduce pollution
- Tax. e.g. Carbon tax, which makes people pay the social cost of pollution.
- Subsidy. e.g. subsidy of alternative energy sources.
- Pollution permits, e.g. carbon trading schemes where firms are given the right to pollute a certain amount; these permits can be traded with other firms.
- Regulation. Limits on a number of pollutants that can be discarded into the atmosphere.
- Changing consumer behaviour – e.g. through advertising, nudges.
1. Tax
The idea of a tax is to make consumers and producers pay the full social cost of producing pollution. For example, petrol tax or a carbon tax.
In this case, the social marginal cost (SMC) of producing the good is greater than the private marginal cost (PMC) The difference is the external cost of the pollution. The tax shifts the supply curve to S2 and therefore, consumers are forced to pay the full social marginal cost. This reduces the quantity consumed to Q2, which is the socially efficient outcome (because the SMC=SMB)
Evaluation
- The advantage of this scheme is that the government raises substantial revenue, which could be used to finance other pollution reduction schemes (e.g. subsidising alternatives)
- It provides a market incentive for firms to offer more efficient engines, which cause less pollution. Increased petrol tax has created an incentive for firms and consumers to switch to less fuel intensive engines.
- One drawback of tax is that demand may be quite inelastic and that an increase in petrol tax may do little to reduce demand and only marginally reduce the amount of pollution. Though in the long term, demand may become more elastic as people switch to other forms of transport over time.
- Another potential problem is that it can be difficult to implement green taxes due to administration costs or it is difficult to know how much to tax.
- In practical terms (non-economic issue), the difficulty is often political resistance – people never like paying new taxes, even if there is a long-term goal of reducing pollution.
- More detail on pros and cons of carbon tax
