Environment and

Ecology II
Labour Welfare and Decent Work
Dr. Johnson Minz
 Question
• Suppose you were asked to comment on a proposed policy to control oil
spills. Since the average cost of an oil spill has been computed as $X, the
proposed policy would require any firm responsible for a spill
immediately to pay the government $X. Is this likely to result in the
efficient amount of precaution against oil spills? Why or why not?

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 Lessons learnt from the example
• Oil spills(like any other hazard) once occurred cannot be undone
• Policy should focus on effective prevention of such hazards
 Role of government
• Direct control (Taxes, Emission standards, emission fees etc.)
• Indirect control (by assigning property rights i.e. an exclusive privilege to
use an asset)

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 Coase theorem
• According to this, a polluter and its victim can achieve the optimal levels
of pollution if property rights are clearly defined and they can practically
bargain with bargaining costs being negligible.
• It is not a practical solution to most pollution problems rather it
demonstrates that a lack of clearly defined property rights is the root of
the externality problem.
 Coase theorem (practical example)
Auto body shop’s Profit
output
Cars per hour Auto body shop Tea house Total (joint)
0 0 400 400
1 300 200 500
2 400 0 400
 Markets for pollution
• Cap and trade system (vs carbon tax): The government distributes a fixed
number of permits that allow firms to produce a specified amount of
pollution. These permits limit the total amount of pollution. These permits
can be traded in a market by means of an auction.
• India’s PAT (perform, achieve and trade) system in energy intensive units