Other Interventions to Address Market Failure (DP IB Economics)
Revision Note
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
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Challenges involved in the measurement of externalities |
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Degree of effectiveness |
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Consequences for stakeholders |
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International Agreements
International Agreements aim to address the negative externalities of production and consumption that are global in nature. These agreements typically focus on:
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
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
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
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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
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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
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