Cambridge International as and a level Economics Ebook

Property rights: 
where owners have a right to decide how 
their assets may be used.
KEY TERM
Regulations: 
a wide range of legal and other requirements 
that come from governments and other organisations.
Pollution permits: 
a form of licence given by governments 
that allows a firm to pollute up to a certain level.
KEY TERMS
Figure 8.5 
Market for pollution permits
P
1
P
0
P
2
0
Price of permits
Quantity of permits
Q
1
Q
0
S
1
S
0
D
1
D
0
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Chapter 8: Government microeconomic intervention

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the property as set down and to enforce property rights 
accordingly. If these rights are assigned, then bargaining 
may be undertaken to achieve an optimum level of pollution.
Two possibilities can occur. Th
ey are:
1 
If a polluting firm has property rights, then those who are 
aff ected by its activities could pay the polluter to reduce 
the scale of activity and hence the pollution. In principle 
the polluter would require payment equal to the loss of 
profit. An example of this might be a situation where a 
long-established but polluting firm is asked to relocate as 
its emissions are aff ecting an increased number of people 
who live in the vicinity. The firm has property rights, so why 
should it move? And if it does move, it should not have to pay 
the cost of a move as it could stay where it has always been. 
The government could threaten to use new regulations, so 
bargaining is likely to take place until a solution is reached.
2 
If those aff ected by negative externalities are assigned 
property rights, then a polluting firm may be sued by the 
owners and obliged to compensate them in some way. 
In this situation there is likely to be a diff erence in the 
bargaining power of the two parties. An individual with 
property rights is likely to experience all sorts of problems if 
taking on a large powerful multinational corporation (MNC). 
The chance of success will be greater if others with property 
rights join the action against the polluting firm. Again, much 
will depend on the bargaining that is carried out before a 
settlement is reached.