Environmental laws that require firms to reduce pollution raise their cost of production
Answers
Pollution is a negative externality – a cost to society. To reduce pollution, the government can use four main policies – tax to raise the price, subsidise alternatives, regulations to ban certain pollutants and pollution permits.
Government policies to reduce pollution
Tax. e.g. Carbon tax, which makes people pay the social cost of pollution.
Subsidy. e.g. subsidy of alternative energy sources.
Pollution permits, e.g. carbon trading schemes where firms are given the right to pollute a certain amount; these permits can be traded with other firms.
Regulation. Limits on a number of pollutants that can be discarded into the atmosphere.
Changing consumer behaviour – e.g. through advertising, nudges.
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