one electric car, two electric cars, three electric cars...

What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be. 

Subsidy is the amount of money paid by the government to a producer, in order to decrease the sum that the consumers has to pay. In other words, subsidies represent payments by the government to suppliers that have the effect of reducing their costs and, consequently, encouraging them to increase output. The impact of a subsidy is the increase of supply and therefore a decrease in the market equilibrium price. 

 

In the diagram above we can see the supply (S1, S2) and demand (D) 

curves. The initial meeting point of supply and demand curves is P1Q1 with consumer surplus above the P1 level. The subsidy shifts the supply curve to the right and the equilibrium price decreases to P2. We can see a growth of consumer surplus. 

The purpose of a subsidy on electric cars, for example, is, therefore, reducing market failure (negative externalities – environmental damage) by encouraging people to buy more environmental-friendly cars. 

Why is pollution an example of a market failure? Illustrate this on a diagram. 
Pollution is an example of market failure because it is a negative externality, which leads to market imperfections. Negative externalities occur when an economic activity affects third parties (not consumers or producers). In the diagram we can see the situation when the marginal private cost = marginal social cost and the private optimum is higher than the social optimum. 

Why could electric cars also be an example of a market failure? 

1. Negative externalities (electricity is still produced mainly from fossil fuels) 

2. Positive externalities to third parties (less pollution) 

3. Imperfect competition (e.g. firms producing electric cars can create an oligopoly – nine cars will be given subsidies and, therefore, barriers of entry occur) 

How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them? 

Under the £43m initiative that started on 1 January 2011, buyers could get a 25% discount up to the maximum £5,000. The subsidy encourages people to buy electric cars because their prices are becoming comparable to conventional car prices. Additionally, lower maintenance costs also encourage consumers to buy environmental-friendly cars. As the former Transport Secretary, Phillip Hammond said: "The point of supporting this technology is to get it up to scale." This mean that electric cars would become more competitive with traditional cars which would encourage producers. 

Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively? The main economic goal of every company is to maximise its profits. By producing electric cars more cheaply and more effectively consumers would be encouraged to buy these products and therefore demand for these goods would rise. Moreover, investments in technology would again lead to higher competition with traditional cars causing the demand for electric cars to increase. However, people argue that electric cars are not the best way of saving our environment because they require electricity, produced mainly from coal and therefore,  there is an argument for investing in hybrid cars technology improvement instead.

Why is there such a high demand for car usage?

Cars allow people to move from place to place more or less freely. Their main advantages are on-demand and door-to-door travel. Cars are the most popular way of transport even if prices and costs of using them are higher than, for example, public transport (or a bicycle!) costs. Of course, demand depends mainly on changes in oil prices but it in a long-term demand is price inelastic. Another reason for a high demand for car usage is, arguably, the lack of close substitutes which would be able to compete with traditional cars. For example, there are more and more electric cars but the infrastructure is not adapted to them (e.g. lack of charging stations). 

Everywhere is walking distance if you have the time. ~Steven Wright

That’s what I think,

MANU

CARBON-DIOXIDE for sale

Explain how the European Emissions Trading Scheme works.

The first carbon-dioxide trade was created by the Kyoto protocol in 1997 but it did not succeed. Launched in 2005, the EU Emission Trading Scheme works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Polluters in capped industries are then given credits for each tonne of carbon dioxide they emit. For example, a coal power company may receive credits under the European Trading System for around 80% of its emissions. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. It is big business – the trade was worth $90bn in 2008, and globally is predicted to grow to up to $3.1 trillion in 2020.

What are the advantages and disadvantages of the ETS as a means of reducing carbon emissions?

ADVANTAGES:

·         It is a way of reducing pollution

·         It has started a public debate on an important issue

·         It encourages investments in new technology

·         The trade in such permits allows polluters to pay for emissions reductions made elsewhere.

DISADVANTAGES:

·         The government's reliance on carbon trading schemes is inefficient and could cause a financial crisis similar to that seen with sub-prime mortgages, says Friends of the Earth

·         Corruption

·         Banks, investment funds and speculators have now become the middlemen in this shadowy trade and are packaging carbon credits into increasingly complex financial products, similar to sub-prime mortgages which triggered the recent economic crash. 

·         The system is so complex the World Bank's latest report claims the EU doesn't even know how many credits are in circulation.

Copenhagen climate change conference in 2009:

Compare these advantages and disadvantages with those of green taxes.

                                                       

·         They give more control to regulators and businesses over future costs of an anti-pollution program. This is due to flexibility afforded in changing the tax rates and in not meeting the target pollution level if costs become prohibitively high. This feature isn't present in Cap and Trade Markets.

·         Green taxes generate revenues for the instituting government. 

·         Tax is regressive in nature, as the extra cost is passed down to consumer. This harms low-income persons as they spend a higher proportion of their income on consumption of such goods as gasoline.

How does the market price of carbon traded within the scheme reflect the toughness of the policy? What else might the price reflect?

The higher the price the tougher the policy, because if the policy is not taught many people want to sell their limits and few want to buy them. During the first phase of the European Emissions Trading System so many permits were allocated the price of carbon fell to almost zero. But the global downturn meant companies reduced their emissions anyway and sold off their credits for cash. The result was another price crash.

What is likely to happen to the carbon price in the coming months? Explain.

In the coming months the carbon price is likely to rise because it is almost the end of the year and the demand for the limits will increase.

 That's what I think, 

MANU

Innovation and technology

Nowadays, in many sectors of the economy, the key to running a successful business is through technology and innovation. One the exceptions is the food industry, in which there are two different trends. Many companies, such as Coca-Cola Co, Danone or Unilever, introduce innovative products to the market, but on the other hand, many consumers look for local, traditional foodstuffs. Global companies compete with such local producers and have to spend a lot of money to make profit and gain market share. The food market, however, is slowly becoming a global market and many local companies are being taken over by the giants.

Many people don’t understand (I do know), that today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs. Most important, as the Internet and globalization widen the pool of new ideas, it's about selecting and executing the right ideas and bringing them to market in record time.

According to different rankings, most of the top innovative companies are originally American. The European Union tries to catch up with them, for example by implementing special EU-funded strategies, such as the Lisbon Strategy. However, it is now considered to have been a failure and new tools are being developed, such as EIT (European Institute of Innovation and Technology http://eit.europa.eu/). 

http://www.fastcompany.com/most-innovative-companies/2011/

In the Internet Era innovation and technology seems to be the best way to succeed. Firms that rely on them do not have to pay particular attention to their environment in their own regions and nations as long as their competitors, collaborators, suppliers and customers are less innovative.

That's what I think.

MANU