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.
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)
- 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
2. Pollution Permits
Pollution permits are a market-based scheme aimed at reducing pollution and trying to encourage firms to reduce the quantity of pollution they create. Permits create a financial incentive to pollute less because you can then sell your excess permits to other firms. In theory, it can be a good way to reduce pollution, using the incentives of the market.
But, in practice, it can be difficult to implement. It is difficult to know how many permits to give out. If the government is too generous, there will be little pollution reduction. If the government is too strict in implementing permits, firms may complain it adversely affects output because they can not get enough permits. This could harm economic prosperity.
Another practical difficulty of permits is that it is difficult to measure the amount of pollution created. There may be an incentive to cheat and hide the amount of pollution a firm creates. This could make the scheme ineffective.
A tax may be ineffective if there are no practical alternatives. However, if the government subsidies alternatives, then firms and consumers will be more willing to switch. For example, solar power is an alternative to burning coal. A government subsidy can make solar power competitive and encourage its development. The subsidy is justified because the development of solar power has a significant positive externality. (See: how close solar power is to other forms of energy)
The problem of subsidies is that there is always a danger government subsidies could be misused. Firms may take the subsidy but keep the money for extra profit rather than for developing the alternative energy source. The government may lack the proper information on what types of energy or firms to subsidise. This may lead to public money being wasted, with little reduction in pollution.
The EU has created many regulations for limiting the amount of pollution in the air. EU pollution regulations This sets strict limits on the number of pollutants put into the air. The advantage of regulation is that they create clearly defined goals and can make sure that pollution levels are actually reduced rather than relying on market-based incentives, which may or may not work.
In the 1950s, the Clean Air Act (1956) was very effective in reducing the visible smogs from cities, such as London. The act banned the burning of coal in domestic homes in major cities.
The main drawback of regulation is that they can be difficult to enforce, e.g. having regulations on air pollution levels, doesn’t say how that will be achieved. You may still need taxes or directives to make sure air pollution levels are reduced.
5. Changing consumer behaviour
Another strategy would be to encourage consumers to change their behaviour. For example, raising awareness of the environmental costs of leaving on heating/air conditioning.
The government could also use ‘nudges‘ from behavioural theory to encourage different behaviour which discourages pollution. For example, signs at schools ‘please turn off the engine’ when waiting to pick people up’ – a simple reminder encourages people to turn off engine reducing pollution.
Alternatively, if the government offer better cycle lanes and firms offer showers at work, these small nudges may encourage people to cycle to work rather than drive.
6. Free market solutions
Some argue solutions to pollution can come from the free market and we don’t need any government intervention. For example, in recent years technological development, falling costs of solar power mean that cleaner energy is now more competitive than many fossil fuels. However, we can’t always leave to the free market because of the free-rider effect. Smog which used to blight London only ended when the government banned domestic coal fires in major cities.