Government Intervention

• Government Intervention


  • where the government intervenes in order to correct market failure
  • takes place in command and mixed economies
• government intervention for External costs

  TPP- Tradable Pollution Permit
• Tradable Pollution/ Discharge Permit


  • Tradable so firms can still access permits for a profit
  • permits given by the government which sets a limit on the total level of pollution to reduce it from$Q_{FM}$ to $Q_{SOL}$
• How TPP's work

  • If a company exceeds permitted levels, they can be fined for an added cost as it is a law to remain below the specified level
  • Therefore, it is an incentive to pollute less as revenue can be made from selling excess permits to other firms
• How can firms reduce pollution levels

  • use more sustainable materials
  • invest in renewable energy alternatives
  • plant trees to offset emissions
  • increase production efficiency to reduce fuels/waste
• TPP Advantages

  • incentive to invest in a clean energy source which is better for the environment
  • reduced pollution reduces external costs which decreases market failure
• TPP Disadvantages

  • Difficult to calculate monetary value of external costs
  • external benefits may outweigh external costs- decreased merit good production and consumption resulting government failure and a net welfare loss