MICROECONOMICS

NAME: HIDALGO, ALYANNAH M. Section: 2LM4 Score: _________

1. Explain: “Without a market for pollution rights, dumping pollutants into the air or water
is costless; in the presence of the right to buy and sell pollution rights, dumping pollution
creates an opportunity cost for the polluter.” What is the significance of this fact to the search
for better technology to reduce pollution?

The production process and the consumption of goods often have disadvantages or external
environmental costs. Externalities arise because there is a non-excludable nature of environmental
goods. Because of this, the resources from the environment becomes a public good since no rights
are given to them. Air and water, for example, are held in common or public, but it is open for
depletion. In a market economy, some costs will be external and there is a possibility for excessive
environmental degradation. One way to resolve this is to define a property right like the creation
of pollution rights. A pollution rights market exists when firms are allowed to buy and sell
government-issued licenses granting the holder the right to create a certain amount of pollution.
Such right creates rights to pollute or not be polluted upon. If a corporation wanted to pollute, it
couldn’t just do so; it would have to buy the rights from a commons trust. In particular, the state
can determine how much discharge it wishes to allow based on marginal social benefit and
marginal social cost analysis. They then print licenses or permits that in total permit the holders
the right to discharge the optimal amount, and then allocate to the polluting firms a share of these
licenses. With this license, the polluter, for instance a corporation, will have an opportunity to
pollute the environment because it was allowed to.
If there are no risks, costs, or disadvantages from polluting the environment, then there is
no driving force or incentive for the polluter to find ways to reduce them. On the other hand, if the
polluter is forced to internalize costs such as a requirement to purchase pollutant credits, he will
seek ways to reduce those costs. One way is finding better technology to reduce the pollution. If
he finds better technology, then he will not spend more money in buying pollutant credits or renew
his license because better technology will prolong the credits he has.

2. Explain the tragedy of the commons, as it relates to pollution.

The tragedy of the commons is a phenomenon that happens when the limited resources are
to be disbursed among the increasing number of competitors. Individuals have equal access to
shared resources and each seeks to maximize his own self-interest causing overconsumption, under
investment and depletion of resources since these resources are scarce, rivalrous and non-
excludable. With regards to pollution, people pollute the environment freely, not thinking that they
are accountable for their actions. They act without trying to avoid the costs of it resulting in an
increase in the amount of pollution of dangerous levels causing massive global warming, climate
change and health risks. Also, conflicting parties like corporations in the same field cause massive
pollution. For example, in the oil industry which is limited and nonrenewable, with an increase in
demand, competition is endless causing great air pollution from burning of coals and others.
However they do not take effort to eradicate the consequences it gives but focuses on the
competition to acquire more resources for profit. In the long run, the repercussions of this tragedy
are bad for the rest of the environment.