Policies for achieving sustainable development
Negative externalities are a form of market failure. There are a number of government responses to this market failure.
- Impose regulations on markets.
- Look for market-based solutions (a solution which the government must enforce)
- Use of indirect/expenditure taxation ("polluter pays" principle)
- Tradable permits (permits to pollute, limits/restrictions/bans)
Taxation
Advantages
The tax increases government revenue but more importantly decreases consumption. The external cost has been internalised, making the producer and consumer accept the cost of pollution from Q1 to Q2.
Disadvantages
There is a difficulty in assessing the value of external costs between individuals and groups. Groups with more influence on government than producer interest groups may put pressure for an outcome favourable to them to be put in place. This often leads to taxes being set at too low a rate to represent full external costs.
Tradable pollution permits
- Overall pollution targets are set by government(s) and pollution permits allocated among producers (at industry level of between countries).
- Those with low abatement costs would have an incentive to reduce pollution levels and sell permits for more than the costs of abatement.
- Those with high abatement costs would have flexibility to buy permits for less than the costs of abatement.
Advantages
Pollution should be efficiently allocated within the overall pollution target.
Disadvantages
- The method is more accepted in principle rather than in practise, e.g. the failed Kyoto agreement.
- Information may be unavailable (a market failure), e.g. producers may fail to go ahead with sale of permits, driving up permit prices and forcing rivals to face high costs of abatement or risk fines for breaking their permitted levels.
Homework
Take notes on the article "Solutions for sustainable development" from Economics today, November 1999.
Development of Structure/social capital
This development can be measured through the implementation of administrative reforms, legal frameworks and enforcement, information channels, development of markets.
- For regulation to function a rigid legal framework is needed within an economy.
- The presence of markets where buyers and sellers can meet is necessary for pollution permits to work effectively. Legal enforcement is also needed here and the punishment for breaking some form of regulatory or taxation system must be great enough to deter firms from taking the risk.
- The free press helps expose corruption such as in the Chinese government as individuals within the economy do not have access to the information about their government being corrupt.
Policies to be applied within developing economies
Market creation - i.e. create markets in tradable pollution permits (very little application in LDCs in practise).
- In Singapore this has proven very effective and permits to pollute are auctioned. This has been very successful due to the rigid legal framework and ability for the market to operate nationally present in Singapore, so this is not likely to be very effective in most LDCs.
Correct market failures - taxation of negative externalities (again limited application in LDCs in practise).
- In China 15% of the cost of pollution control is financed by tax revenue.
- However the Chinese government are corrupt and have not effectively enforced their legislation.
Regulation of markets - restrict pollution, recycling, targets etc
- A charge in the Netherlands on the pollution of surface waters has been very successful and the amount of pollution of surface waters has fallen by 73%.
- Bans, permits and quotas can be successful such as bans on pesticides in Indonesia, water use quotas in Israel and successful in part in logging bans in Costa Rica.
Apply new "clean" technologies and use renewable resource substitutes.
- The revenue from taxation can be invested such as that collected in the Netherlands from the taxation on the pollution of surface waters to improve sewage facilities.
Responsibility of developed nations
Remove the subsidies that promote negative externalities (e.g. overproduction of western agriculture, over-consumption of carbon energy).
Support technology transfer to developing economies; making technology and its benefits more accessible.
- Taxation and regulatory systems to achieve sustainability are only enforceable in developed nations, at level of development, which can only be achieved through pollution and damaging the environment. Aid from developed nations may help developing nations in this respect.
These notes are from a lesson on 6/10/04 and a homework given in that lesson.
