The Environment

Content

• Market failure and the environment • Markets and the environment• Government policies and the environment:

– Indirect taxes– Pollution permits– Regulation of Markets and the environment

• Macroeconomy and the environment

Market failure and the environment

• Environmental consequences of business behaviour often result in market failure as they cause more social costs than social benefits

• Social costs or negative externalities caused by production of goods include pollution of air and water, the destruction of countryside areas and noise pollution

Market failure and the environment

• Because markets do not consider environmental factors they often supply more of a product at lower prices

• This can result in increased destruction of the environment

• The environment is able to absorb a certain level of pollution however if more pollution is created it results in negative externalities

Markets and The Environment

• Markets allocate resources to do with supply and demand

• They are reliant on the environment as they utilise factors of production which are finite including land

• Some environmental goods such as the sea are effectively public goods as it is impossible to eliminate free riders

Government Policies and The Environment

• The government can use a number of instruments to control environmental damage

• The government will implement these policies as they believe the negative externalities and impacts on the environment need to be reduced

• In addition governments may try and reduce environmental damage due to pressure groups and public opinion

• In addition international standards such as the Kyoto treaty have meant governments need to consider the environment

Indirect Taxes

• Indirect taxes are those that are not levied directly on an individual but collected from the person who bears the tax by intermediaries who then pass the monies to the government

• Indirect taxes can be used by the government to correct for market failure caused by damage to the environment

Indirect taxes and the environment

• Indirect taxes are used by the government when social costs on the environment exceed private costs

• Producers / consumers are therefore charged the full social cost so demand will fall accordingly (the extent to which it falls is due to the elasticity of the product)

Indirect taxes and the environment

• Some argue that indirect taxes are the best way to reduce harmful CO2 emissions from the producer

• These taxes cause the supply curve to shift inwards increasing the price of the product and decreasing the quantity demanded

Pollution taxes

• A pollution tax seeks to convert the external costs of pollution into a private cost and thereby reduce the level of output to the socially equilibrium level

• Pollution taxes are based on the view that the price of the product should reflect the full cost of producing it including any social costs

Pollution taxes• Pollution taxes can be passed on to the consumer in the

form of higher prices• If goods are inelastic firms are more likely to pass on

pollution taxes to them in the form of higher prices• This increased prices may be most felt by the less wealthy

causing a inequality in the allocation of resources• Pollution taxes are likely to be most effective when

introduced worldwide

Climate Change Levy

• Climate Change Levy 2001• Government has identified 10 sectors of the economy who

are energy-intensive users e.g. chemicals, food and drink • This is a tax on energy usage offset against national

insurance contributions• If the companies are able to meet energy and carbon

saving targets they get an 80% reduction on their bill• Aim is to reduce energy usage and emissions

The Environment and The Macroeconomy

• There are often conflicts between macroeconomic objectives and the environment

• Economic growth can have a negative impact on the environment as increased production often increases levels of pollution and environmental damage

• Often businesses grow at the expense of the environment

Market regulation and the environment

• The government is also able to regulate markets to try and decrease the amount of environmental pollution

• Regulation can occur when the government enforce planning restrictions and pollution restrictions

Macroeconomy and The Environment

• Environmental objectives often conflict with economic objectives such as:– Growth– Balance of payments in balance

• The more rapid the rate of economic growth the greater the level of production and the increase in levels of pollution etc

• Environmental factors can reduce the efficiency of domestic operations making exports more expensive than imports

Summary• Market failure often results due to environmental factors such as

pollution causing negative externalities and the environment • Some environmental products are public goods as you are unable to

protect from free riders• The government intervenes in markets to reduce the negative

externalities caused by environmental damage• They can use indirect taxes to increase and the cost of products to

consumers• Pollution permits are used to control the level of harmful pollution• Macroeconomic objectives often conflict with environmental

objectives such as growth and the protection of the environment