ECS2606 Environmental Economics ASSIGNMENT #2 SEMESTER 2

ECS2606 Environmental Economics ASSIGNMENT #2 SEMESTER 2 Question 1 Discuss the difference between subsidies and transfer payments In accordance with (Barry C. Field, Martha K. Field 2017), subsidies as well as transfer payments are both incentive based methods used to encourage pollution reduction by firms which are implicit to have environmental uses through their production of services or goods. These incentive-based methods are designed to mitigate the downsides of the standards approach to pollution control. However, these differ in the way they are planned, implemented and executed by the government body or agency. Subsidies are policy based and monitored by a government established body or authority whereby the firms are charged a price for emissions released into the environment for each unit of emission. The firms are given the opportunity to devise strategies that will abate their emissions at their own discretion and for every unit of that the source or firm cuts back they are given a subsidy towards the effort. By allowing polluters to determine how best to diminish emissions helps to give the firms a strong incentive to use privately acquired information they have or can acquire about pollution control costs of alternative energies instead of having the authorities determine how it can be done (Barry C. Field, Martha K. Field 2017). As mentioned above, the difference in the planning and execution of these incentive-based strategies are significant. Transfer payments are taxes, payments made by the responsible contaminators to the public sector and eventually to those in society who are benefited by the subsequent public expenditures. The polluter itself may be a recipient of some of these benefits. Transfer payments are therefore not a social cost of the policy. Thus, the social costs of compliance are the polluter’s total abatement costs. Social costs of compliance include only the real resources used to meet the environmental target; they do not include the tax bill. (Barry C. Field & Nancy D. Olewiler 2011)