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Economic Analysis: Monetary Policy & Environment

In: Business and Management

Submitted By SAK789
Words 1261
Pages 6
In a free market society where firms and households shape the economy, government intervention can significantly contribute to economic stability and improve current economic outcomes. The successful use of government policy tools is evident through an examination of environmental economics, monetary policy and the labour market. With regards to the environment and the labour market, the government have made use of taxes, permit trading systems, general regulations and transfer payments to influence economic outcomes in each of these respective fields. By studying monetary policy it is also apparent that control over the interest rate mechanism is another effective tool used by policymakers to enhance the present and future economic circumstances of a nation.
As society continues to expand, the quality of the environment is beginning to deteriorate. Governments to prevent this from occurring and to avoid market inefficiency, can help the economy through policy tools such as enforcing taxes and regulating pollution permit trading systems. As shown in Figure 1 below, market equilibrium (Me) on its own is inefficient because it does not take into consideration the negative externalities that arise during production and does not account for a lack of incentive by firms to incorporate additional production costs. The implications of market failure will mean that a society will not be allocative efficient and as a result output will be greater than it what it should be (Q0 instead of Q1).
Figure 1

In order for society to be producing at the socially optimal level (Se), governments can enforce taxes and/or pollution charges on firms; so that they are forced to pay for the negative externalities that arise during production such as bad air and water quality or pollution. A per-unit tax is one of the most practical methods that policymakers can use to promote...

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