WORKING OF POLLUTION-TAX AND TRADABLE-PERMITS TO CONTROL ENVIRONMENTAL POLLUTION

Industrial activity is one of the main reasons for environmental pollution. Industries are not only causing air pollution, they are contributing a lot to water and land pollution too. The economists consider this environmental damage as a negative externality or an external cost.

Something which has to be borne by the rest of the society and not by the producer causing it. Unless concrete measures are taken to internalize these externalities, the private producers driven by their profit motive will not take concrete measures to curtail the pollution. Such measures are to be taken by the government.

Government has the authority and responsibility to make the industry behave in a responsible manner. With the ever-growing intensity and severity of the problems like global warming, ozone depletion and acid rain, the governments across the world cannot just sit back and watch the companies destroy the planet. The current paper tries to describe some of the measures which can be adopted by the government to compel the industrial sector to control the ecological damage and practice eco-friendly practices.

The paper is divided into 4 parts. The first part describes the concept of negative externalities and graphically displays how it causes loss of social welfare. The second section illustrates the measures which the government can adopt to compel the private producers to consider the external cost of environmental damage as their inte