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http://www.thestar.com/Business/article/189364

Analysis:

The article discusses the problem of pollution in Canada, TD bank of Canada’s economists suggest that beyond emission regulations that is already in process, taxing, subsidizing, and a trade system for emission credits are the ultimate ways to “create long-term conditions for industries and consumers to cut down on their emissions.”
The article brings up the market failure problem of pollution and states that “consumers will not change their behavior as long as it’s cheap to pollute.” As pollution creates negative externalities or additional harm to the society for the production of emission gases it is widely known as a market failure. This proves the statement the article made as market failures such as pollution that produces negative externalities usually involves a social cost beyond the obvious private costs. As the emission gases harms and pollutes the environment, an extra cost is then needed to deal with the pollution and clean the environment. This cost is the social cost.

(picture)As market failures such as pollution creates negative externalities for the society, an addition social cost is then created beyond the original private cost. It is this cost that the consumers and the firms tries to escape leaving the government paying for pollution.


Graph 1: Demonstration of Market Failure and its addition social cost

Just as the above diagram demonstrates, it is this social cost of pollution that creators of it – consumers and firms, tries to escape and thus resulted in the government policies enforcing the consumers and firms to pay this cost.
As the article identifies the “crux of the problem” or the market failure as the fact that “clean air is considered a free commodity.” and that simply “legislating emission cuts, only masks this problem and doesn't create long-term conditions for industries and consumers to cut down on their emissions.” Here the article revealed the essential cause of the problem - “clean air is considered a free commodity.”, because of the fact that clean air is a common resource, consumers and firms uses the good thinking they that they do not have any responsibility over any harms it causes or any costs it requires. This is the classic parable called Tragedy of the Commons. The “emission cuts” the article referred to represents the regulation policies by the governments. This policy deals with the restriction of production which sets a price floor to the market.

(picture)With the price floor or restriction to production, the quantity of production for the pollution causing good is reduced while the price is increased. Soon the Private cost curve will be forced to shift up and become just like the social cost curve in order to reach equilibrium


Graph 2: Government regulations of emission cuts

Just as the above graph demonstrates, the regulation policy forces the consumers to pay the higher price and the producers to produce at the lower rate. However, as the article also referred this policy as “only masks this problem”, it suggests how the existence of just this one policy will not solve the ultimate problem in the long run.
The two strategies that the entire article really favored were taxing and emission trading system or simply tradable pollution permits. The collective taxing policy deals with the collection of social costs of pollution more directly while the pollution permits allows the firms to make the deal more profitable.

(picture) The corrective tax sets a price for the pollution while the demand curve determines the quantity of the pollution. Together the social cost of pollution is paid by the consumers and the suppliers through taxes.





Graph 3: Government corrective taxation on pollution

The corrective tax, also known as Pigovian tax, demonstrated on the above graph is equal to the external cost of pollution with negative externality. Thus taxation is able to force the people to pay for the external cost.



(Picture) By limiting the amount of pollution permits, the quantity of pollution is limited while the demand curve help determine the price of the pollution. With the limit amount of quantity and the tradable characteristic of the permits, firms are able to benefit off each other while paying for the social cost of pollution


Graph 4: Tradable Pollution Permits

The tradable pollution permits suggested in the article is another one of the possible policies for government to gain back the social costs of pollution. The tradable characteristic of the pollution permits allowed the firms to negotiate and trade among each other while benefiting through the process. This strategy enables the firms to pay for the external cost of pollution while the “proven profitable” strategy also gives them the incentive to obey such policies.
Therefore just as the article has been arguing, although government regulations on the production of emission gases deals with the market failure, the policy is not as effective as taxation or tradable pollution permits. Thus it is inevitable to have the other two policies in process in order to battle against the market failure of pollution.