Aiu Microeconomics Unit 4

Unit 4 Emissions

ECON220-1302A-03: Microeconomics

Stephen Opalat

May 24, 2013

Abstract

This paper will discuss the externalities of our lifestyles and whether they negative or positive. Pollution is always a hot topic in the US with global warming. To help cut down on pollution the government uses cap and trade and a pigouvian tax. We will also look at how each one of these work and how they are used.

Unit 4 Emissions

It seems like everywhere you turn you here about how pollution is contributing to global warming. Here in the United States and around most of the world we are accustomed to a particular life style that helps create pollution. These items that we love like electricity sometimes produces externalities. Externalities are effects of a consumption or production decision made by one agent on the consumption set, utility function or production of other economic agents which do not work through the price system (Schmidtchen, 2009). These can be positive or negative, but in this case the externality is pollution, which is negative. Cap and trade and a Pigouvian subsidy would be to policies that should be in place.

Cap and trade is the government sets a cap (a total amount of pollutants that can be emitted), issues tradable emissions permits, and enforces a yearly rule that a polluter must hold a number of permits equal to the amount of pollutant emitted (Krugman & Wells, 2009). This would work well with older businesses that are more expensive to up fit with new technology so it wouldn’t put them out of business. The government would set a cap and then issue permits. An older business may need more permits then issued so the could buy from the new business that might not need all the ones they were issued. The benefit would be that new business would update their technology so they don’t get taxed and would allow them to make money off there extra permits, which in return would lower the...