Cambridge International as and a level Economics Ebook

Regulation and equity: 
Negative production externalities 
are a common form of market failure. The challenge for 
governments is to use various forms of regulation and 
control without unduly restricting firms in their operations.
KEY CONCEPT LINK
Negative consumption externalities
Th
ese externalities are the spillover costs caused by 
consumers. A good example is the case of urban road 
traffi
c congestion. Where roads are congested, there is 
overconsumption and excessive exhaust emissions are 
poured out into the atmosphere, causing problems of poor 
China’s first carbon trading programme
In July 2013, China’s first carbon trading programme started 
in Shenzhen, an industrial city on the border with Hong 
Kong. Shenzhen was an obvious choice for this pilot 
scheme – it is the fastest growing and most aff luent city in 
China. As a Special Economic Zone, it has many electronics 
and telecom equipment manufacturers as well as 
hundreds of small factories making light bulbs and lighting 
accessories. Its air, however, is heavily polluted and a source 
of much complaint from Hong Kong residents who suff er 
when the wind is blowing foul air their way.
A carbon emission management scheme involving 635 
manufacturers has been set up, which is designed to cut 
25% of CO
2
emissions by 2015. Companies have been given 
100 million tons of free carbon credits over the next three 
years. Those who exceed their quota will be fined at the 
rate of three times the average market price per ton. At 
the launch of the scheme, two large manufacturers each 
bought 10,000 tons of credits as a form of investment. If a 
company fails to cut back on its emissions at the agreed 
rate and its value added output does not increase as quickly 
as estimated, the municipal government will take back a 
proportion of the carbon credits that have been allocated.
Shenzhen has learned a lot from the ETS’s experience. In