Evaluate proposals for reducing environmental air pollution by energy E

Evaluate proposals for reducing environmental air pollution by energytaxation and emissions trading.Pollution is created as a by-product of output in most industries. Itcan be described as an away equal to the economy as its existencecauses a spill of welfare to the population as a whole, and, in a freemarket, this loss of welfare will generally go uncompensated. However, that does not mean that the optimal level of pollution iszero, contrary to the environmentalist presumption, as this would meanthat economic activity would have to be zero and this is illogical. Therefore, an optimal level of pollution and be economicactivity has to be found. According to the Pareto efficient, theideal allocation of resources occurs when nobody can be made betteroff without making someone else worse off. In the case of pollutionproduction, this can also be defined as the point of production wherethe marginal net private benefit (MNPB) of the polluter is equal tothe marginal external cost (MEC) as a whole, as shown on diagram 1, atthe level of economic activity Q*. The polluters total net privatebenefit from production is illustrated on diagram 1 as the area belowthe MNPB curve and total external cost is the area below the MECcurve. Using this analysis, we can see that A is the largest area ofnet benefit available, thus confirming that Q* is the optimal level ofactivity. However, without regulation in this market it is likely thepolluter will continue to operate at Q to maximize their own privatebenefits, although this will create an unacceptable level of externalcosts. Therefore, the government faces several policy choices in orderto regulate pollution and keep it at an optimal l... ...mits arealso effective in take down emissions, but only if they are auctionedoff and tradable in the market. If there is grandfathering (givingpermits only to established firms in the industry) or output basedallocation present whence this would incur a greater cost to the economythan a uctioning off permits, thus increasing the optimum level ofemissions.Bibliography* Banzhaf, Burtraw & Palmer, Capping Emissions Where Efficiency and Public Interest Intersect, Public Utilities fortnightly, beginning(a) Dec 2002* Pearce & Turner, Economics of natural resources and the environment, Harvester Wheatsheaf, 1990* Pindyick & Rubinfeld, Microeconomics 2nd edition, Macmillan, 1992* Parry. I, Are Tradable Emissions Permits a Good Idea? Resources for the future Issue Brief 02-33* DTI, Energy White Paper, TSO, Feb 2003* www.defra.gov.uk