The Role of Government in Environmental Protection

The final controlling authority in most of the issues related to environment is the government itself. For example, most of the thermal power plants are owned by the government and also only the government can build dams, roads, railways, etc. Industrial or any other related activity cannot start without the approval of the government. Therefore, the government has to apply various checks and controls so that the environment is managed properly.

How can the government establish incentives that would lead industries to choose the efficient amount of pollution control in their own best interest, even if they do not face all the social costs of residual emissions?

1. Direct Regulation

Direct regulation of polluting activity (i.e., setting a legal limit for pollution) frequently comes to mind. The government could, for example, simply limit the industry’s pollution to R units by decree. Direct regulation of this sort was popular in the United States shortly after the setting up of Environmental Protection Agency, a government organization tasked to regulate any practice that may have an adverse effect on the environment. Created in 1970, the EPA became the US government’s answer to increasing qualms about the wanton disregard of some industries and their unsafe practices that pose hazards to human health and the environment in general.  Aside from safeguarding human and environmental health, the EPA is also empowered to craft and enforce regulations under existing environmental laws. It is also responsible for researching various methods to protect the environment.  Since its creation, the EPA took the lead in implementing changes to make the United States a better place to live in.… Read the rest

The Economists View of Environmental Pollution

Why do people use resources like the environment? This is because, pollution is a byproduct of activities that add to their welfare. These activities bring economic gain to producers and utility gain to consumers. We do not pollute the planet just for fun; we do it as part of activities that improve our welfare. The economists view of environmental pollution is that pollution creates another trade-off of cost and benefit that must be weighed on a case by case basis.

Many of our streams and lakes have historically served as depositories of chemical waste generated by industrial plants and mines. Some are cleaner now, but many still suffer damage form earlier discharges of chemicals, like PCBs whose “half-lives” are measured in hundreds of years. Many pesticides, fertilizers, and detergents used by farms and homes find their way into our lakes and waterways, where they have damaged commercial and recreational fishing. Automobiles are primary source of many air pollutants. The residue of their emission can foul both the air that we breathe and the land located close to the road that we drive on. Factories generate particles of various kinds, often through the combustion of fossil fuels; these pollute the air and fall onto the ground-both near and far. Some of our pollution has even been shown to cause damage on a global scale. The production and emission of chlorofluorocarbons has damaged the ozone layer and exposed much of the planet to increased ultraviolet (UV-B) radiation from the sun; the emission of carbon dioxide and other greenhouse gases has begun to warm the planet at rates that many find alarming.… Read the rest

Poverty Trap

Poverty trap is a situation where an unemployed person receiving social security benefits not encouraged to seek work because his or her after‐tax earnings potential in work is less than the benefits currently obtained by not working. The poverty trap occurs due to benefits such as income support, housing benefit, single parent allowance and family tax credit. Given that social security benefits represent the ‘bottom line’ (that is, the provision of some socially and politically ‘acceptable’ minimum standard of living), the problem is how to reconcile this with the ‘work ethic’.

For example, consider the case of a low-skilled person in the UK. He is unable to get a high-paid job because he doesn’t have the right skills, training or experience. He has two options. First one is to get a low-paid job or second option is to claim unemployment benefits. If he gets a low paid job he will have to pay taxes and national insurance so he decides he is actually financially better-off just claiming benefits for being unemployed. As time goes by he carries on claiming benefits and continues to lose his ability and confidence in himself. This makes it more difficult for him to get a decent-wage job and more appealing to continue living on benefits. We can say that he is in the poverty trap.

One suggested way to release people from poverty trap is for government to provide employers with employment subsidies that allow them to pay wages higher than the minimum level of social security, even though the marginal revenue product of the work undertaken does not warrant it.… Read the rest

Importance of Capital Controls in Economic Policy

Globalization of capital investment and finance has surfaced for a long period of time in the world of global financial market. Capital flow liberalization has brought up the importance of capital controls for some countries to achieve their economic growth.

The Description of Capital Controls

Since the failure of Bretton Woods system in 1971, the international capital movements within developed and developing countries become unstable and for some countries the capital flows need to be controlled. Capital controls are restrictions to regulate the movement of capitals which are flowing in or out of the country. Capital flows may be in forms of bank loans, portfolio investment and foreign direct investment. The controls of short terms portfolio investment and bank loans are quite necessary since they are quite risky because of the roll-over risks. For long term credits and FDI are less risky if they are politically guaranteed.

Looking back to the history of capital controls there were two different perspectives. The first was John Maynard Keynes who was the pioneer of the capital controls regime. Keynes was supported by other known economists such as James Tobin, Dani Rodrik and Joseph Stiglitz. The main ideas behind their view are that financiers are really powerful to pursue profits in every part of the world and ignoring other factor such as labor. Keynesian view assumes that a fragile financial system is caused by the free movement of capital as volatile capital flows and it will lead to destructive of important asset prices such as exchange rate, equities and real estate.… Read the rest

Objectives of Fiscal Policy

By fiscal policy we mean, the government’s tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Public borrowing  involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation.

The following are the objectives of fiscal policy:

  1. Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people to reduce the current and future consumption. Specifically the attempt is to bring down and control the conspicuous consumption of the rich people. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
  2. Maximization of capital formation is the second objective. Through this objective the country can try to achieve an accelerated economic growth. This will help the country to overcome the stagnation and achieve a higher rate of economic growth.
  3. The third objective is to divert the available resources from the less productive to most productive purposes. 
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Economic Policies to Control Inflation

Inflation has to be controlled, otherwise the extent of damage done to the economy will be something substantial and the economy would take a long time to recover from the effects of inflation. In this direction of control of inflation, the following are the theoretical measures available. These measures could be classified into three groups viz. Monetary measures, Fiscal measures and Other measures.

1. Monetary Measures

Monetary measures are steps taken by the Central bank of a country as the head of the monetary system. These measures are usually refereed to as the, quantitative credit controls and qualitative credit controls. The former include bank rate, open market operations and the variable reserve ratio. The, latter include margin requirements, moral suasion, direct action, control through directives, consumer credit regulation or rationing, publicity, etc.

  1. Quantitative Credit Controls: Bank rate is the first, measure to curb credit creation activity of the commercial banks, as during inflationary period the volume of money supply has to be reduced. Bank rate is the rate at which the central bank of a country re-discounts the bills already discounted by the commercial banks. When the central bank wants to control credit creation by commercial banks, it would simply increase the bank rate. Correspondingly the commercial banks would increase the discount rate which acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills. However, the success of this policy depends on the co-operation of the commercial banks. Open market operations are another quantitative credit control measure. 
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