Pollution is seen as an example of market failure. In particular, pollution is an example of a negative externality – a cost imposed on a third party. For example, when driving a car, other people suffer from the emissions e.g. global warming, air pollution. Therefore, in a free market, there tends to be the overconsumption of goods which create negative externalities. Therefore governments implement anti-pollution measures which can include
- Taxes. Higher taxes on fuel emissions will reduce demand and pollution. However, demand tends to be quite inelastic for these goods.
- Subsidies. Subsidising alternative sources of energy can provide an incentive to increase the supply of different fuel sources
- Pollution permits. Pollution permits are a tradeable permit scheme which gives firms and countries an incentive to reduce pollution, otherwise, they have to buy more permits.
- Regulation. Regulation can limit the amount of pollution; for example, banning cars on certain days.
Evaluation of anti-pollution measures
- Global co-operation. The problem with anti-pollution measures is that they require global cooperation and this is often difficult to achieve. For example, the Kyoto agreement on global warming was never ratified by the US. This creates a free-rider problem, countries can rely on others to improve the air quality, but not make efforts themselves.
- Business costs. Anti-pollution measures involve higher taxes and regulations, which increase the cost of business, leading to higher prices for consumers.
- Government failure. There is always the possibility of government failure with uncertainties about the right type of intervention.
- Evasion. High carbon tax may encourage business to try and evade.