dealing with externalities

http://www.economicshelp.org/blog/economics/carbon-tax-pros-and-cons/

http://www.economicshelp.org/blog/economics/carbon-trading-schemes/

Discuss the case for Implementing a congestion charge for Driving into Birmingham city centre

A congestion charge is a form of tax imposed on cars driving into city centres. It is argued that driving into city centres creates significant negative externalities. Firstly, there is pollution; but a bigger problem is the congestion that is caused. Congestion is a significant external cost, because traffic jams increase journey times leading to higher costs for firms and wasted output.

The social cost of driving is much higher than the private cost and therefore there is overconsumption of car journeys into city centres (especially at peak hours) Petrol tax is not sufficient to include the external cost of congestion, therefore there is need for a congestion charge which makes drivers pay the full social cost of driving.

This will raise revenue for the government, which can be spent on improving public transport. It will also achieve greater social efficiency because drivers have to pay the social cost of driving. It may also encourage people to find different methods of travelling into work such as
cycling.
However, there are problems with a congestion charge. Firstly, it is not so easy to charge motorists. It requires taking a photograph of their number plate and making sure they pay. There are high administration costs involved so the tax raised will be less that hoped. Also, there is the danger that the congestion charge could lead to a loss of business for firms living inside the congestion zone. It may encourage out of town shopping, which would be bad news for the city centre and could lead to firms closing. It could also move the congestion from the city centre to outside the city.

Also, it could be argued the tax will increase inequality. People on low incomes will not be able to afford it, but people on high incomes will.

Discuss the role that Pollution Permits could play in reducing global warming?

Pollution permits are schemes to limit the amount of pollution created. Firms could be given quotas to pollute a certain amount of carbon dioxide. If the firms pollute more then they would have to buy more permits from other firms. If they pollute less than their quota then they could sell their permits to other firms. There is a clear incentive to pollute less and develop more efficient production methods, in order to reduce pollution. This scheme creates a market incentive to reduce pollution, because the more you pollute the more you pay. It is a way of charging firms for the negative externalities that they create.

However, there are some difficulties with the scheme. Firstly, it is difficult to know how many quotas to give out. If the government is too generous then pollution levels may not fall. If they are too strict with quotas it may restrict business. A simpler solution may be to simply tax production which causes pollution; this would raise revenue rather for the government as well.

Another problem of the scheme is that it is quite costly to administer. It is costly to set up and costly to monitor how much pollution a firm creates. There is also the scope for firms to cheat and exceed their output quotas without knowing - it is difficult to monitor pollution levels, it may require self-monitoring by firms.

Another issue is that global warming is a global problem. Therefore, to be effective it needs global co-operation. If some countries don't take part, multinationals may move to these areas and pollute their. If the pollution permit scheme is international, it may cause developed countries to buy permits of poor countries and this will hamper economic development in developing countries.

Merit goods

Discuss whether the government should end free health care for people and make them take out private health care insurance like in the US?
Health care is a merit good. This means in a free market, it will generally be underconsumed. Firstly, people may underestimate the benefits of seeing a doctor, especially for a check-up.

If people have to pay for health insurance, some people may choose not to do it. This could lead to a rise in treatable diseases such as cancer. Secondly, health care is said to have positive externalities.

If people receive good health care treatment then they will be more productive and the economy will benefit. Therefore, if it is left to the market, there is a danger health care will be underconsumed leaving an underclass of people without health care and lower productivity. Also there is a powerful argument to say health care is an important public service and therefore everyone has the right to free treatment at the point of use. It is not a good like TV or cars; health care is essential to standards of living.

Making health care free at the point of use means there is equality of provision and everyone can get treated. If it is left to private health care, some people may not be able to get insurance.

However, it is argued private health care may be more efficient and give better quality services for patients. Because there is a profit incentive, firms will seek to offer good quality health care to get customers. However, it is debatable whether profit motives work in health care. Doctors are generally motivated by desire to help patients rather than financial gain.

Another argument in favour of private health care is that it would provide consumers with more choice. Also it would help reduce waiting lists which exist on the NHS. If people go private there is likely to be a fall in waiting lists. It would also enable the government to reduce taxes.

However, consumers would have to switch from paying taxes to paying private health insurance, and the poorest might not, and may therefore suffer a loss of welfare.