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In order to reduce the high levels of greenhouse emissions, as well as satisfying Australia's "Kyoto target" obligations, the government has put forth legislation that would fine retailers who "do not meet the [pollution] target".

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Introduction

IB Economics Dianna Gu D 0794008 Economics Portfolio (Section 1: Recourses and Markets) Rod Myer, 9th May 2002, "NSW introduces greenhouse law", The Age. Commentary written on the 17th July 2002. In order to reduce the high levels of greenhouse emissions, as well as satisfying Australia's "Kyoto target" obligations, the government has put forth legislation that would fine retailers who "do not meet the [pollution] target". The environmental damage, which these emissions cause, is a source of market failure1 that must be attended to by the government to ensure a better future. Energy sources, which involve electricity, gas, petrol, etc., are demerit goods that have a negative externality in their production: pollution. ...read more.

Middle

Moreover, if the retailer exceeds its limit then they will be paying a fine for the negative externality; this fine of $15 per tonne of carbon dioxide acts very much like a tax. Ideally, the amount of the fine should equal the social cost of the pollution. Fig. 1. Fig.1 Fine. The market is currently supplying at price P1. This is the privet equilibrium point. If the social cost is taken into account, the equilibrium moves to quantity QS and price PS. By imposing a fine that acts like a tax, the government would be hoping to shift the equilibrium to this socially optimal point. ...read more.

Conclusion

Fig.1 Fine The demand curve is inelastic. When the tax in imposed the new equilibrium point is at quantity Q1 and price P1. The Quantity has only decrsed marginally but price has dramatically increased to P1. It is obvious that the government must do something to fix this form of marketing failure. However, this fine may not be the best solution as, just like a tax, it is likely to be passed onto consumers. Furthermore the problem of producing a necessity that is too highly priced for Low-income groups will have a regressive impact on the distribution of income. A better alternative for the NSW government would be passing on subsides for retailers not producing greenhouse emissions or retailers who are employing the use of renewable energy to solve this problem. Commentary word count: 450 words. 1 ...read more.

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