1. Explain how the reference to “repeat offenders” in the news story highlights the issue of market failure.

The “repeat offenders,” as referred to in the news article, are firms who continuously pollute the environment to a severe degree. These firms pollute more than they are supposed to, mainly because they are over producing the goods. This is essentially what causes the market failure. The overallocation of resources to the production of the certain product (for the market-equilibrium-quantity of the firm is much greater than the socially-optimal-quantity) is a symptom of market failure, as resources are not allocated efficiently.

2. Discuss the degree of success experienced by the Environment Agency in dealing with cases of environmental damage. Cite at least two case study examples to illustrate the points you are making in your answer.

The Environment Agency has been quite successful last year in dealing with cases of environment agency. For instance, after it has begun its work with water companies in order to improve the quality of water (by regulating sewage discharges), the quality of bathing water has increased. For example, according to the EA, in 2005, 99% of the waters in England complied with the EC Bathing Water Directive mandatory standards, demonstrating a 21% increase since 1990. In addition, with its stringent waste management program, the Environment Agency has decreased the number of serious pollutions in England by over 25% just last year.

3. Consider the solutions to the problem of market failure in this context and examine the case for and against each measure. Support your answer with appropriate examples.

1) Corrective taxes

Corrective tax essentially is a tax on a firm’s pollution: the more the firm pollutes, the more it will be taxed. Thus, the corrective tax is an incentive for firms to produce less (and closer to the social optimum) in order to incur fewer losses (due to the taxes). Also, not only will a corrective tax discourage the firm from producing, but it will also encourage the firm to seek out for cleaner and environment-friendly methods of production. However, this method has its flaws. Firms, which consider it more profitable to pay taxes rather than decrease their production will continue to do so. Take the example of the “repeated offenders” in the article; they continue to pollute the environment through excessive production and pay the taxes because the firms find it more economically beneficial to produce, pollute, and be fined rather than decrease their production. Thus, in this sense, the corrective taxes fail to achieve its primary purpose.

2) Financial incentive to invest in appropriate technology

This method may be effective if the incentive is greater than the benefit the firms receive from continuing to produce the way they do. For example, if the firm finds that the benefits of investing appropriate technology, which is more environment-friendly (for example get financial subsidies if they invest or evade taxes by ceasing to use environment-hostile technology), is greater than the profit they make by producing the way they do, they will invest, reducing pollution. However, if the incentive is not greater than the economic profits (from the way they produce now), then it will continue to produce the way they do (environment-hostile), still creating pollution. This is like the case of the “repeated offenders”: although they have continuously been taxed, they preferred to continue producing and polluting rather than seeking out for other technology.

3) Tradable permits

This method of pollution-reduction is economically efficient. First of all, the government will regulate the amount of pollution each firms may make by issuing pollution permits, essentially the amount of pollution each firms may make. However, not all firms are equal: some firms find it inexpensive to cut down on pollution while some firms find it much more expensive to cut down on pollution. Thus, this method allows the firms who can easily cut down on pollution to sell its pollution permit (which it did not use, for it cut down its pollution) to the firm that has trouble reducing its pollution. That way, pollution may be reduced in a cost-effective way.

4) Extension of property rights

Essentially, according to this theory, a firm may be fined for polluting an area that belongs to someone else (just as an individual will be fined for damaging someone else’s property). While this method may deter firms from polluting, for they would be fined every time they polluted someone else’s territory, it may not work as well as the other methods. This is because unlike actual property (houses, for example), it is difficult to determine who the owner is for natural territory, such as streams, and especially more so with air. But, it must be acknowledged that the Environment Agency did actually succeed in gaining “ownership” of natural territories, so that they may fine firms who pollute them.