Fines for Environmental Pollution (Externalities)

Peyton Manning

Hey guys,

Bit of help needed with a question here. I've been asked to discuss the benefits and limitations of a system of fines to curb environmental externalities.

Now, the two main benefits are fairly clear.

- Firms reluctant to over-pollute
- Any fines mean more government revenue
- And possibly, increased demand for better technology products

Am I missing anymore?

As for the disadvantages, the only two I can come up with are:

- Difficulty determining pollution limit / level of fine
- Firms reluctant to overproduce -> can lead to under production and lack of goods or services

Im supposed to get 4 pages out of this, so I really don't think I have enough. Any suggestions or related literature (online) ? Thanks

andrew

Disadvantage: It's hard to know in a real sense who will actually pay the fine, and thus it's debatable whether fines will actually reduce pollution.

If a company can simply pass the cost of a fine over to their customers without seeing a reduction in demand for their product (because demand for the product is inelastic), then the company won't have an incentive to reduce pollution. If not their customers, then the company could also pass the cost onto their shareholders by reducing dividends. The end result is the same; fines, but no reduction in pollution.

cavedave

One problem with fines is they do not take into account how easy it is to reduce pollution. The Coasian view is to allow pollution trading as explained here

Contemplative

Depending on the type of pollution you're talking about, it can be very difficult and costly to actually ascertain whom is in fact polluting and by how much.

Furthermore, there will be a cost to monitor the pollution levels of individual firms/households.

What may happen as a consequence is that the production/consumption of some good or service which is the ultimate cause of the pollution is taxed/fined directly rather than the pollution itself.