Tradeable Allowances

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

Tradeable allowances (sometimes called pollution permits) are permits sold or otherwise issued by government allowing a specific amount of pollution to be released. They were introduced in the United States Clean Air Act amendments of 1990 (see MRU video on the left below).

Click for MRU video

Click for MRU video

Alex Tabarrok (reference below, video on right) examines tradeable allowances as a solution to the problem of externalities. Tabarrok notes that the tradeable allowances system was successful in that the target pollution (sulphur dioxide) went down even while electricity production continued to increase.

 

He notes that tradeable allowances are similar economically to Pigouvian taxes but with the important political difference that polluters are more likely to be accepted by industry.

TradeableAllowances3

Tradeable allowances and climate change

Tabarrok notes that, in principle, either tradeable allowances or Pigouvian taxes could be applied to the problem of reducing global carbon dioxide emissions. However, he notes that this is a harder problem that the 1990s measures to reduce sulphur dioxide emissions because the latter are more geographically localized, and could be addressed in ways that involve a single country or regional block of countries. Carbon dioxide is a truly global pollution problem involving the whole planet with all countries having a stake.

Practice questions

From http://www.mruniversity.com/node/210663 and http://www.mruniversity.com/node/210671, accessed 6 May 2016.

  1. An increase in the number of pollution allowances does which of the following:

Atlas topic, subject, and course

Externalities (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, Trading Pollution (4-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/deeper-look-tradeable-allowances, accessed 6 May 2016.

Alex Tabarrok, A Deeper Look at Tradeable Allowances (6-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/deeper-look-tradeable-allowances, accessed 6 May 2016.

Page created by: Ian Clark, last modified 6 May 2016.

Image: Alex Tabarrok, minute 0.14 of Alex Tabarrok, A Deeper Look at Tradeable Allowances (6-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/deeper-look-tradeable-allowances, accessed 6 May 2016.