(a) Economic incentive system to reduce pollution or to lessen the environmental degradation is developed in response of the same.
With more and more countries embracing capitalistic economic system, demand and supply is playing an important role in economic sphere of these countries.
As most of this book suggests that economics and environment are interlinked and it is the economic hunger that have led to over - exploitation of natural resources and degradation of environment.
With economics responsible for such scenario it would be equally good if economics provides the remedy.
Any approach that reduces the pollution or environmental degradation would be ethically justified and if economic incentives do the same they should be considered ethically right.
With world becoming more and more materialistic our mental image about the world at large is already undergone a vast change and everything now has been proportioned in terms of economic incentives to be achieved from them.
In midst of such to keep environment out of that loop would be like living in a fool's paradise. Also, economic incentives work.
For example, it has been witnessed that emission charges compel the firms to control some pollution because it benefits the firm to reduce its emissions until the marginal cost of reduction is equal to the emission charge. This, in fact, minimizes the cost for the firm.
Also, such charge induces the firms to develop new, cheap and efficient technology to control emission.
Both these factors reduce the pollution and environmental degradation and demonstrate the fact that economic incentives work.
However the point that economic incentives like emission charges increase the cost of finished products and therefore their price and have adverse effect on the poor but another point that is worth considering is that these economic incentives also compels the firm to invest in new emission controlling technologies which initially may raise the price but in long - term provides benefits in term of low cost and low emission.
So, may be in short run economic incentives look unfavorable but in long run they are both effective and efficient.
Moreover, it is the poor who bear the largest burden of environment degradation.
Clean environment would be a boon for them and would increase their productivity and income.
So, keeping in view these points economic incentives are ethically justified.
(b) Under system of emission change, government collects levy on each unit of pollutant emitted in to air or water by the firm.
This approach works to control pollution in the sense that under this system pollution costs firm money and therefore firm will look for ways to reduce its emission.
It should be noted that each firm can control some pollution at a cost which is lower than the emission charge. Moreover, each firm tries to decrease its emission until its marginal cost of reduction equals the emission charge.
This means each firm tries to minimize its control cost.
Therefore, authorities should implement such a charge that control costs of all firms get minimized.
But, in absence of information about control costs, authorities find it difficult to establish correct charge regime.
Lower charge defeats the purpose and does not lead to desirable emission reductions whereas higher charge compels firms to look for illegal ways.
Thus, this system works on trial and error method and takes time to find appropriate charge rate and results in volatile emission charges which generally bring results inadequate in face of expectations from them.
Under emission permit system, all polluting sources face limit on their emissions and are allocated a limit up to which they can emit.
These limit or allowances are generally granted to the firm free of cost or through auction.
One important point in this system is that firms can freely trade these emission charges with each other.
For example, if a firm is allocated 7 allowances and another firm 8 allowances whereas first firm requires 4 allowances to comply with limits while second firm need 11 allowances to comply with limits.
Both firms can enter into exchange with each other and thus can bring in desired results (reduction in emission levels).
In this system, free trade of allowances keeps the allowance market in equilibrium and achieves the cost effective allocation. Moreover, authorities from first attempt itself achieve the minimization of control costs without having any knowledge of these costs and thus do not have to go through trial and error method as was the case with emission charges.
Flexibility of this system in terms of free trade of allowances helps in achieving objective of desired emission standards at lowest possible cost.
Allowances offer great deal of certainty about marginal cost of control.
Thus, allowances or emission permit approach allows or aggregate emission standard to be met with certainty and therefore are more ethically desirable than emission charges.