Evaluate policies that could be implemented to reduce the market failures arising from polluting industries.

1 - Definitions: Products of such industries are de-merit goods with negative externalities in production and as such MSC > MPC of production, so products are over produced under the free market (this is the market failure)- diagram to explain this overproductionOutline briefly which policies essay will discuss eg. specific tax on production, pollution permits, regulation2- Explain and Evaluate each Policy: (explain=how policy corrects market failure and evaluate=consider government failure)Tax: Diagram of how tax works by increasing production costs so MPC+tax=MSCExample- car productionEvaluate diagram- welfare loss, increased prices- is the tax regressive?, dependent on elasticity of demand (if inelastic- consumption not reduced by much- ineffective- but lots of government revenue raised which could be reinvested in green technology to combat the problem, making demand more elastic in the long run as substitutes become available- eg electric cars- making tax more effective long term)Evaluate tax as a policy- will tax be too high that it causes firms to shut down? will burden of tax fall on consumer- yes if demand is inelastic. All firms treated the same- old ones penalised?Pollution Permits: Explain tradable pollution permit system works- government hands out certain amount of permits which allow certain levels of pollution. Firms who can efficiently cut pollution can, before selling their permits to older firms who can't cut down as easily- this is a Market Based SolutionExample- Kyoto Protocol- could be seen to have failed as rich US firms bought all permits and carried on polluting (evaluate)Evaluation- Costs of enforcing the policy- opportunity cost with strain on public funds currently?Regulation: Works by imposing a limit or ban on pollutionEvaluation: Paternalistic, again has high enforcement costs, penalises older more inefficient firms (is this a good thing?)- could go out of business. Further policies could be discussed during the tutorial.3- Conclusion- weigh up arguments and policies presented early on and state which is best and why.