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Home / IB / Economics / SL / Revision Notes / 2. Microeconomics / 2.8 Market Failure: Externalities & Common Pool (Access) Resources / 2.8.6 Other Interventions to Address the Market Failure


2.8.6 Other Interventions to Address the Market Failure


Tradable Pollution Permits

  • Governments calculate an optimum (or preferable) level of pollution
  • They then create a pollution permit market and issue permits to polluting firms
    • This is also known as a Cap and Trade Scheme (CATs)
    • Each permit is typically valid for the emission of one ton of pollutant
    • Firms that pollute more have to buy additional permits from less-polluting firms
    • The price of the permit represents an additional cost of production which reduces the supply
    • This helps to reduce negative externalities of production
    • The price of the permit changes as it is determined by demand and supply
        
  • If the cost of additional permits is more than the cost of investing in new pollution abatement technology, firms will be incentivised to switch to cleaner technology
    • Firms can then sell their spare permits and gain additional revenue
       

Evaluating the use of Tradable Permits


Evaluation Point


Explanation

Challenges involved in the  measurement of externalities

  • Is extremely difficult to calculate the level of CO2 emissions in an economy and this level constantly changes
  • The initial number of permits is based on this calculation and should ideally be significantly less
  • If the calculation is too high then the permits will have no impact on emissions whatsoever

Degree of effectiveness

  • It still provides a permit to pollute
  • When the calculations are correct, it can be effective in decreasing emissions and reducing the welfare loss
  • Larger firms have the resources to buy all the permits while smaller firms struggle. Over time this can effectively create monopolies in polluting industries
  • If the demand for the end product is price inelastic in demand, then firms will pass on the cost of this permit to their consumers in the form of higher prices

Consequences for stakeholders

  • Increased costs of production for firms
  • Some firms may invest in new technology so that the permits are not required
  • Some firms may no longer be able to compete
  • Some firms may switch their production to countries with no pollution permit scheme
  • Higher prices for consumers

International Agreements

  • International Agreements aim to address the negative externalities of production and consumption that are global in nature. These agreements typically focus on: 
  1. Common pool resources such as international fishing waters e.g. the North East Atlantic Fisheries Commission (NEAFC) is representative of member countries and sets annual limits on fishing in the North East Atlantic
  2. Environmental and climate change challenges e.g. Cop 27 ( the United Nations Framework Convention on Climate Change) has 165 countries working together to reduce global warming
  3. Global trade in demerit goods e.g. the United Nations Office on Drugs and Crime has 27 countries working together to combat organised crime
     

Evaluating the use of International Agreements


Advantages


Disadvantages

  • Many problems require a globally co-ordinated response and the reduction in welfare loss is greater when countries work together
  • Resources can be pooled and used for the greatest good
  • Levels of international cooperation and interdependence can increase

  • More economically developed countries (MEDCs) have developed using 'dirty technologies'. Less economically developed countries (LEDCs) are under pressure to accept agreements which reduce the use of 'dirty technology' and this may not be realistic as it would decrease their economic growth
  • There are usually no legal consequences to withdrawing from international agreements
  • When new political parties come to power they may seek to change agreements or withdraw from them e.g. President Trump withdrew USA support for the Paris Climate Change agreement

Collective Self-governance

  • Collective self-governance occurs when the stakeholders in a community work together to combat the negative externalities of production usually associated with common pool resources

Evaluating the use of Collective Self-governance


Advantages


Disadvantages

  • Working together can provide a common purpose and build a community
  • The community knows how to best manage scarce resources in a sustainable way and it is in their best interests to do so
  • Communities can create employment opportunities related to managing the scarce resources
  • A powerful strategy that has been beneficial to promoting eco (sustainable) tourism in many areas e.g. Borneo rain forests
  • The welfare loss is reduced

  • There can be disagreement about how to best manage the resources
  • Taking back control of common pool resources from multinational corporations or organised crime gangs can be highly confrontational/violent
  • This strategy works better when private property ownership rights are given to the communities for the natural resources around them

Government Provision

  • Merit goods and public goods are under-provided thus causing market failure
     
  • Public goods are beneficial for society and are not provided by private firms due to the free rider problem
    • They are usually provided free at the point of consumption but are paid for through general taxation
    • Examples include roads, parks, lighthouses, national defence
       
  • Merit goods are beneficial to society but consumers cannot always access them as they are priced out of the market (e.g. private education or healthcare)
     
  • One of the final ways to address the under-provision of goods and services is for governments to provide them
      

Evaluating the use of Government Provision


Advantages


Disadvantages

  • Essential /valuable goods and services are usually provided free at the point of consumption
  • They are accessible to everyone regardless of income
  • These usually provide both private and external benefits to society

  • Paid for through general taxation
  • There is an opportunity cost associated with their provision
  • Products which are free may result in excess demand and long waiting times e.g. procedures at Public hospitals


  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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