AN ASSIGNMENT
ON
PUBLIC ECONOMICS
Course code: 204
Submitted To,
Submitted By,
Farah Ishaq
Assistant Professor
Institute of Health
Economics
University of Dhaka
Md. Manik Islam
ID:27
Session:2018-19
2nd year, 3rd Semester
3. Explain why subsidies for pollution abatement equipment, even if they result in an
efficient level of pollution abatement, will not result in an efficient resource allocation.
Answer: A subsidy is a benefit given to an individual, business, or institution, usually by
the government. It is usually in the form of a cash payment or a tax reduction. The
subsidy is typically given to remove some type of burden, and it is often considered to
be in the overall interest of the public, given to promote a social good or an economic
policy.Subsidies can be used to increase pollution abatement (decreases pollution).
Firms can reduce pollution by producing less, or by changing production methods.
Changes in production methods may entail direct expenditures for pollution control
devices, or changes in the input mixes and other alterations in the production process.
Fines related directly to the amount of pollution ensure that firms will undertake the
pollution abatement in the least costly—most efficient—manner possible. Assume that
there is a given, known marginal social cost imposed on others by each unit of pollution
(measured, say, by the number of particles added to the air per unit of time). It is costly
to reduce pollution—and we assume that at any given level of production, it costs more
to reduce pollution more. In other words, the marginal cost of pollution control is rising.
This is depicted in Figure-1 which we measure along the horizontal axis the reduction in
pollution (from what it would be if the firm spent nothing on pollution abatement).
Efficiency requires that the marginal social benefits associated with further pollution
abatement expenditures just equal the marginal social costs, point P* in the diagram. If
the firm is charged a fi ne, f*, equal to the marginal social cost of pollution, the firm will
undertake the efficient level of expenditure on pollution abatement.
Now I will draw a graph which indicates efficient control of pollution.
Price for
pollution
Marginal cost of pollution
abatement pollution
abatement
f*
Marginal social cost of
pollution (marginal benefits of
pollution abatement)
0
P*
Level of pollution
abatement
EFFICIENT CONTROL OF POLLUTION
The efficient level of pollution can be attained either by charging firm a fi ne of
f * per unit of pollution (say, measured by the number of particles added to the
air) or by imposing a regulation that firms have a pollution abatement level P*.
f
Price
Marginal social costs
before subsidy
Marginal social costs
after subsidy
Marginal private
costs before subsidy
Marginal private
costs after subsidy
D=Marginal benefit
Qe
Qe
Qe
Qe
Output of
steel
0
Efficient level
of output with
no subsidy
Efficient level
of output with
no subsidy
Output
before
subsidy
Output
after
subsidy
Market equilibrium with pollution abatement subsidies: Firms can reduce pollution
by producing less, or by changing production methods. Changes in production methods
may entail direct expenditures for pollution control devices, or changes in the input
mixes and other alterations in the production process. Fines related directly to the
amount of pollution ensure that firms will undertake the pollution abatement in the
least costly—most efficient—manner possible. Assume that there is a given, known
marginal social cost imposed on others by each unit of pollution (measured, say, by the
number of particles added to the air per unit of time). It is costly to reduce pollution—
and we assume that at any given level of production, it costs more to reduce pollution
more. In other words, the marginal cost of pollution control is rising. Even after the
pollution abatement subsidy, the equilibrium level of output of steel is still inefficient;
the firm fails to take into account the extra costs of public subsidies for pollution
abatement associated with increased output of steel as well as the marginal social cost
of any remaining pollution.
8. What is the externality associated with an additional individual’s driving on a
congested road? How do tolls help alleviate this externality? How should the toll be set?
Answer: Externalities are actions of an individual or firm that have an effect on another
individual or firm for which the latter does not pay or is not paid.
When a driver enters into a road he gains some mobility and bears some cost of driving.
But as he enters into road the space to other driver becomes congested. This congestion
cost is not born by this driver but bear other driver. This is an example of negative
externality.
Toll road is not for all drivers. It is for them who pay for it. It is the simple and strong
argument behind toll. Actually negative externality in this case can be reduced as toll
road is no more public goods; it slightly changes its nature. If toll reduces the road
congestion then it implies that externality also is reduced. Variable toll is very useful. It
depends on the time of day whether it is peak hour or free hour, size of the vehicle etc.
This method is very reasonable as it reflects that the rate of toll is determined by the
degree of congestion a driver is making.
10. Many economists are worried that unless all countries are required to reduce their
levels of greenhouse gas emissions, reductions in emissions in one country may be
partially offset by increases in another. Explain how this might occur.
Answer: The one area in which little progress has been made is global warming and
greenhouse gases. The scientific community was able to show that the current level of
carbon dioxide concentration in the atmosphere due to the burning of carbon—from
coal, gas, and oil—is, indeed, substantially greater than it was at the beginning of the
Industrial Revolution, and continues to grow. Scientists have also established that there
was overwhelming evidence that these substantial increases were leading to significant
increases in Earth’s temperature. To many, the world seems embarked on a risky
experiment with our planet as we continue to add carbon dioxide and other greenhouse
gases to the atmosphere; it is leading not just to a warming of Earth, but also a rise in
the sea level. There will be severe adverse effects from this warming, especially on the
tropics, and the increase in sea level will obviously have adverse effects on low-lying
islands and countries, such as Bangladesh, Vietnam, and the Netherlands. Other
predicted effects include an increase in the variability of weather. Even though there is
clear evidence for the increase in greenhouse gases, and there is a general (but not
universal) consensus on the long-run effects, there is more controversy over whether
the effects are already being felt. There is evidence, for instance, of a marked increase in
losses from weather—far greater than the increased losses from no weather events such
as earthquakes. Although there is some disagreement among economists about the
magnitude of the overall costs—with some countries in cold climates actually
benefiting—the consensus, reflected in an agreement made in Copenhagen, is that the
costs will be large. As the scientific evidence has mounted, the issue has taken on
greater urgency over the past two decades. In 1997 collective global concern resulted in
adoption of the Kyoto Protocol, under which industrialized countries pledged to reduce
their emissions of greenhouse gases. To reduce overall costs, the countries agreed at
Kyoto to explore more market-based mechanisms—tradable permits and a variant called
“the clean development mechanism” or joint implementation—because one country
would “buy” the greenhouse gas reduction from another; in effect, by paying for it, they
could be thought of as “jointly” implementing the greenhouse gas reduction. Joint
implementation can be thought of as a limited form of marketable permits. Some critics
suggested that the United States was advocating joint implementation not out of a
commitment to economic efficiency, but because it could not or would not take
measures that would reduce greenhouse gases within its own borders. Today, there are
many active cap and trade systems for greenhouse gases.
"Joint implementation" is a programme under the Kyoto Protocol that allows
industrialized countries to meet part of their required cuts in greenhouse-gas emissions
by paying for projects that reduce emissions in other industrialized countries. The
operation of the joint implementation mechanism is similar to that of the "clean
development mechanism”. To go ahead with joint implementation projects,
industrialized countries must meet requirements under the Protocol for accurate
inventories of greenhouse-gas emissions and for detailed registries of emissions "units"
and "credits”. If these requirements are met, countries may carry out projects and
receive credits beginning in 2008. Under the Kyoto protocol most developed nations
other than the US committed themselves to targets for cutting or slowing their
emissions of the key greenhouse gases that cause climate change. The targets varied
between nations. Some were allowed to increase their emissions by a certain amount;
others were required to make significant cuts. The Kyoto mechanisms: The Netherlands
has a 6% emission reduction commitment under the Kyoto Protocol (2008-2012) targets
and aims at a 10% reduction in post-Kyoto targets (2020). The provision of JI projects can
stimulate further actions from the part of suppliers and market players and therefore
enhance the dynamic effectiveness of the hybrid scheme. An integrated JI scheme can
be quite efficient in terms of achieving targets set for both instruments, depending of
course on the target level.
The basic idea of JI is that industrialized countries can achieve their GHG emission
reduction commitments partly on the territory of other countries via emission reduction
co-operation, using lower marginal abatement costs. In The Netherlands, 33 million
tones of CO2-equivalent emission reduction are to be achieved under JI projects as one
of the tracks to reach the 6% reduction target for the country under the Kyoto Protocol
 Stimulate sustainable development through technology transfer and investment
 Help countries with Kyoto commitments to meet their targets by reducing
emissions or removing carbon from the atmosphere in other countries in a costeffective way
 Encourage the private sector and developing countries to contribute to emission
reduction effort