AQA ECON3 ANSWERS 25 MARK QUESTIONS JANUARY 2011

Transcription

1 AQA ECON3 ANSWERS 25 MARK QUESTIONS JANUARY 2011 I wish to make clear that these answers are my own suggested approach and are not endorsed by AQA. There are other approaches to the question besides the ones taken here, although the intention is that these are examples of good answers to the questions set. In particular, different evaluative judgements to those which I have made in answer to a question may be equally valid if supported by well-placed economic theory or real world evidence or examples. The guidance below provides some support in approaching questions. Good luck with your studies and the exam. Peter Cramp Symbols The answers here are annotated in much the same way that they would be by the examiner when marking candidate scripts. The symbols are designed to highlight the skills being demonstrated at each point in the answer: D Definitions Kn Knowledge, for example of economic events or data I Issue A relevant issue or point is raised. This is often in the first sentence of a paragraph. Ap Application Applying the information in the extract, or knowledge of economic events or data, to help support the answer to the question. An Analysis The use of relevant economic theory in answering the question, building up logical chains of reasoning. E Evaluation Making judgements about the significance of particular factors, especially in providing a final answer to the question. Evaluation should be supported by relevant economic theory, information from the extract or the candidate s own knowledge

2 GUIDANCE 1. It is common exam practice to define key terms in the question in the introduction to your essay. 2. The first sentence of each main paragraph of your work should clearly specify the point or issue which will be analysed in the paragraph. 3. The issue to be analysed in each paragraph should be clearly related to the question. Suppose the question is Evaluate ways in which governments can make markets more competitive. It is appropriate to use paragraphs beginning One way in which governments can make markets more competitive is 4. The analysis in each paragraph should be a logical chain of reasoning. The more detailed this analysis is, the better, so include as many links in your chain as possible. 5. Appropriate use of economic diagrams is another way of demonstrating the skill of analysis 6. You must have tight focus on the question set. Good economic analysis, but based on material which is irrelevant or of borderline relevance may result in a lower mark than if the material had not been included. 7. The skill of evaluation is vital to scoring high marks for 25 marks answers. This involves making reasoned judgements in response to the question. 8. The main place that evaluation is expected in your work is in your conclusion. You must reach a final judgement that answers the question set and your judgement must be backed substantially by appropriate economic theory and/or real world evidence 9. You are also likely to include some evaluation in the main body of your essay. This can usefully be undertaken at the end of a paragraph following substantial analysis, or in a separate evaluative paragraph following on immediately. 10. You may also choose to include some evaluation in the main body of your essay. If so, this should come at the end of a paragraph in which you have already undertaken significant analysis. 11. The more specific your judgement can be the better. Suppose for instance that the question is Evaluate the view that the government should not regulate prices in utility industries such as gas, electricity and water. A candidate might argue that the government does not need to regulate prices if there is sufficient competition in the market to ensure that prices are kept low. This is indeed an example of evaluation. It would be stronger evaluation if the point were supported by an assessment of how competitive utility markets are in reality. Suppose a second candidate were to take the same starting point, but went on to argue that the water industry is not competitive, and this is associated with the fact that it is a natural monopoly. Further, in gas and electricity markets, there are several firms for

3 customers to choose from, but there has been some evidence that demand for the services of any one firm is inelastic, due to consumer inertia or lack of knowledge. This has allowed firms to raise prices to customers more than any increases in their costs of production. If the second candidate cited this evidence and concluded that it provides a basis for the government to regulate prices, he or she would have undertaken much stronger evaluation than the first candidate. This is because a specific and supported judgement has been made about how appropriate regulation of prices would be in the utility industries stated in the question. It is a good idea to study previous questions and to have a stock of examples and real world data that would help to answer them. You can pick up such examples from these suggested answers.

4 AQA ECON3 JANUARY 2011 CONTEXT 1 D/Kn Monopoly power is the power to set prices. Such power is enjoyed by some firms in concentrated markets, where a few firms enjoy a large market share, while a pure monopoly exists when there is only one supplier. Governments are generally wary of monopoly power, seeing it as a cause of market failure through misallocation of resources. Ap In the case of the creative industries, however, there may be good reasons for supposing that monopoly power is in the public interest (Extract C, Line 14). I The case against the government protecting monopoly power in the UK creative industries is founded on the idea that such power operates to the detriment of the consumer. An Firms with price-making powers generally choose to raise the price, exploiting inelastic demand resulting from a lack of good substitutes for the product in question. As a result, demand contracts and fewer resources are allocated to the product than would be the case in a competitive market. The misallocation of resources is clear from the fact that the price, which indicates the marginal benefit received by the last consumer of the good, is raised above the marginal cost of production. This implies there are further units of the good that could be produced and bring a net benefit to society. The effect of this is shown in the diagram, which compares output and price under conditions of monopoly and competition. An Diagram The case against monopoly power

5 I On the other hand, it can be argued the UK government should protect monopoly power in creative industries in order to create incentives for innovation. Ap As explained in Extract B, technology has led to competition for creative industries in the form of illegal copying of materials. An This is making it difficult for creative firms to charge for the benefits they create. Due to the free rider problem, creative outputs have become non-excludable, available to those who have not paid. Substantial investment is needed to create, for example, a new computer game, and such investment is less likely to take place if those who undertake it can achieve a return on their investment. Ap The fact that the output of creative industries is increasingly treated as a public good by consumers, with little regard for the intellectual property rights of firms, can itself be considered a market failure and a reason for the UK government to protect monopoly power. Ap The creative industries contribute nearly 8% of GDP and are expected to grow at twice the rate of the rest of the economy between now and I A key issue is whether they can do this without protection of monopoly power by the government. An In some cases, property rights can be protected by encryption, but while this is possible in the case of television services, it does not necessarily apply so easily to other creative outputs. It could also be argued that illegal downloads simply prevent the owners of intellectual property rights earning excessive profits. If the differential between an illegal download and a legitimately purchased download is small enough, consumers are likely to choose the legal version. Thus, the owners of property rights are constrained in the extent to which they can artificially raise prices. Kn This has led to firms such as Spotify offering unlimited music downloads at one monthly price in preference to trying to charge a high price for individual downloads. An/E The fact that the creative industries are already contributing so strongly to the economy suggests that they are able to survive, and even thrive, in the presence of illegal competition, and make enough profit to generate an incentive to innovate in spite of that competition. I It might also be considered that attempting to take stronger action to protect monopoly power in creative industries is a thankless task for governments. The ability of individual users to conduct file exchanges over the internet makes it very difficult for the government to track and punish all those who infringe intellectual property rights. I/E It is arguable that the enforcement costs of attempting to do so would exceed the benefits the policy could bring. As the internet allows global exchange, there is also a limit to what any government can do in insolation to protect intellectual property rights. It would probably not be effective for the UK government to act alone. Evaluation/final judgement (s) It is desirable that there should be a high and growing output from creative industries in the UK. Competition between these outputs offers choice (it is better for the consumer that there should be hundreds of songs to choose from than just a few, for example, or that there are numerous different computer games on the market). Such competition does not

6 infringe upon intellectual property rights unless one creator copies the ideas or technologies of another. So, the question as to whether the UK government should protect monopoly power in the UK creative industries really amounts to whether it should take stronger action against those who actually do infringe upon intellectual property rights. The evidence suggests that UK creative industries are already faring well with the current level of protection, while there is good reason to suppose that it would be difficult for the government to enforce stronger protection. Action from within the industry itself, including models such as that operated by Spotify, is already combating illegal activity. It might also be reasoned that illegal activity has some advantages to holders of property rights, for example by making their work better known and leading to legal purchases by those who would not otherwise have been aware of the availability of software. Ap As argued in Extract B, the industry has to be creative in order to find new ways to build on legal downloading. These considerations provide a strong argument for the government maintaining existing levels of protection of monopoly power in creative industries, rather than trying to strengthen this protection.

7 AQA ECON3 JANUARY 2011 CONTEXT 2 D/Kn Under EU law, citizens of member states have the right to live and work in other member states without restriction. This is what is meant by the free movement of labour. An In theory, this means that scarce labour resources can be allocated efficiently. Shortages of labour in particular countries, or specific sectors of the economy, should be alleviated because excess demand puts upward pressure on wages. This acts as a signal of the shortage and provides an incentive for workers to relocate from elsewhere in the EU. I One benefit for the UK of free movement of labour across the EU is the potential to relieve skills shortages in some sectors of the economy. Ap/An The example of dentists is given in the extract. With the average UK dentist earning over 89,000 per year, but tempted by greater rewards in private practice, it is useful to the NHS to be able to recruit trained dentists from elsewhere in the European Union, such as Poland, this bringing knock-on benefits for NHS patients. I In other sectors of the economy, shortages of skilled workers, such as IT professionals, can put severe constraints on the growth of firms and lead to pay leapfrogging as firms try to attract suitably qualified workers, raising labour costs and making firms uncompetitive, a fate which the free movement of labour can help to avoid. I A second benefit of free movement of labour to the UK is that an influx of skilled workers boosts the quantity and quality of labour available, An thereby helping to create economic growth by enhancing the capacity of the economy, and helping to limit inflation. This is illustrated in Figure 1. The UK s low inflation through most of the first decade of the 2000s was contributed to by influxes of labour from within the EU and outside. An Diagram Immigration of skilled labour adds to the UK s economic capacity

8 I One cost of the free movement of labour may be downward pressure on the wages of some relatively low-paid UK workers. An/Ap As Extract D demonstrates, there are concentrations of migrant labour in some low-skilled sectors such as Agriculture and Distribution and Hotels. It may be that some migrant workers are attracted to the UK not by relatively high wages but simply because employment opportunities exist. An Migrant labour adds to the existing labour supply to an occupation, putting downward pressure on wages (see Figure 2). Thus migrant labour can be argued to have contributed to the growing wage gaps between low and high skilled workers in the UK economy, and in turn to relative poverty. I/An/E A greater problem may be that some low-skilled UK workers are displaced from their jobs and may become structurally unemployed, if they lack the skills to move between occupations, or the will or ability to move geographically to secure work. E The evidence on the effect of migrant labour in low-paid sectors is unclear, however. Many employers state that it is impossible to find UK workers willing or able to do the work in question, so that migrant workers are relieving labour shortages in these sectors just as they do in high skilled areas. An Diagram Migrant labour puts downward pressure on UK wages I/E A further cost of free movement of labour is that it may put strains on infrastructure and public services. Local road networks may struggle to support additional traffic generated by concentrations of migrant labour locating in one geographical area, for example. It is sometimes argued that there has not been sufficient capacity in schools to educate the children of migrant workers, and that difficulties have been posed if children do not speak English as a first language. Furthermore, those settling in the UK are entitled to treatment from the National Health Service and payment of benefits in line with those available to UK citizens. I/K This has the potential to create further demands on the already stretched finances of the UK government and explains why the UK government is keen to find ways of limiting inward migration from new member states of the EU such as Romania and Bulgaria.

9 Evaluation/final judgement (s) It is possible to judge that at the macroeconomic level, the mobility of labour has been good for the UK economy, helping to enhance economic performance as more workers have been attracted to the UK, some of them highly skilled. An The gain in skilled labour will almost certainly have outweighed any loss of skills from UK workers migrating elsewhere in the European Union. Any costs are likely to be felt more by individuals, especially any displaced from their jobs. Such costs have the potential to be substantial if they are located in particular geographical regions, generating poverty and perhaps associated social problems. I There is also a danger that they are long lasting effects. While some workers are mobile between countries, many workers are not mobile occupationally or geographically even within the UK economy and may be rendered unemployed for long periods of time. To limit this impact, governments may have to spend substantial money on retraining programmes, itself a cost. I At the microeconomic level, the effect of the free movement of labour may differ between sectors of the economy. There is little doubt that firms in sectors with labour shortages will benefit from the ability to recruit workers in from outside of the UK. Ap However, labour markets do not work perfectly and it is likely that there may be surpluses of labour in some sectors, attracted by non-monetary considerations as highlighted in Extract F, and this is less desirable for the UK economy. Thus the evidence on whether free movement of labour in the EU has created a net benefit to the UK economy is mixed, but it is possible to judge that inwards migration of skilled labour is more economically desirable than of low skilled workers. Kn This conclusion is further supported by UK government policy on migration from outside the EU, where a points system is now operated to determine whether workers are granted a UK visa.

10 AQA ECON3 JANUARY 2011 ESSAY 1 D/Kn Economic theory standardly assumes maximising behaviour on the part of economic agents. Consumers are assumed to maximise utility from consumption subject to their limited income, for example, while workers maximise income subject to the constraint of wanting leisure time. It is assumed that firms pursue profit maximisation, although a number of other maximising behaviours are possible in reality such as revenue maximisation or maximising the volume of sales. It is also possible that firms do not adopt maximising behaviour at all, perhaps satisficing in response to shareholder discipline or that the policy of the firm is the result of complex interactions between various stakeholders. For a firm to profit maximise, it would be the case that it sets output where marginal cost is equal to marginal revenue. If an additional unit of output were to be produced beyond this, it would add more to the firm s costs of production than its revenue, thus reducing profit. The diagram below shows profit maximising output and the corresponding price, read from the demand curve. It also shows some other possible objectives for the firm. Sales revenue maximisation, for example, occurs when marginal revenue is equal to zero, as the next unit produced would carry negative marginal revenue and hence reduce total revenue. The point where sales of the good are maximised subject to making at least normal profit is also shown (at the point where AR=AC). An Diagram Objectives of the firm

11 I Profit maximisation may become less important as firms grow in size due to the divorce of ownership and control. An The larger the firm becomes, the less likely it is that the owners are in direct control of the behaviour of the firm. In a PLC, for example, the owners of the firm are its shareholders, but they have no direct input into the running of the company. E While they may try to hold executives to account for the running of the company, and executives may in turn try to get managers to enforce their objectives, it is difficult to imagine that information flows are strong enough to allow the owners of the company to ensure profit maximisation. So, while shareholders may be able to exercise some discipline over management through votes at AGMs, and perhaps slightly stronger discipline by selling their shares if they are discontented, this discipline is unlikely to provide too much constraint on management. Therefore managers within companies may have considerable freedom to pursue their own objectives. An This might include maximising their own financial rewards or reputation, things that may be more closely associated with the market share of the company or its revenue than profits. This may lead to satisficing behaviour by which such objectives are pursued subject to any constraints imposed by shareholders. The sales maximising point in the diagram is an example, as normal profits are still made. Profit levels below normal level might be sufficient to cause the shareholders to remove the executives responsible for running the company. I Profit maximisation may also be less important for firms operating in a monopolistic market structure. An Although monopolistic firms may be large, the reason that such firms may depart from profit maximisation is more due to lack of competition and protection by entry barriers than the size of the firm as such. It is argued that firms with monopoly power may be able to make substantial, possibly supernormal, profits without actually maximising profit. This allows for a degree of slack in the organisation of the firm and profits might not be maximised due to the existence of inefficiency, as illustrated in Figure 2. Firms may also refrain from maximising profits in order to limit the threat of intervention by the authorities to limit the monopoly power of the firm. An Diagram Firms with monopoly power may be able to tolerate x-inefficiency

12 I It is possible that profit maximisation is not an important objective even for all small firms. An Although the owners of small firms such as sole trader organisations and partnerships are more likely to be in direct control of the operation of the firm than is the case in larger firms, it does not necessarily follow that the owners of the firm wish to profit maximise. They may choose not to for any number of reasons, including a wish to accept social responsibility to their employees, customers and the local community. Other small firms may be set up as charities or may be not for profit organisations as is now the case with a number of football clubs such as Lincoln City. Evaluation/final judgement (s) This demonstrates that it is clearly not the case that all small firms profit maximise while larger firms do not. However, there may be some merit to the claim that profit maximisation becomes less likely as firms grow in size. This is not just for the reason of divorce of ownership and control, but also because of the complexities involved in running a large firm. There are many agents who are likely to attempt to influence the conduct of a large firm, including employees, unions, customers, managers of various departments and so on. I Behavioural theory suggests that there is no one model which can predict the conduct of such complex organisations. I It is also a strong argument to say that it is factors such as the structure of ownership and management of the firm, and the market structure that they operate in, that have the greatest influence over the conduct of the firm. An Although these are linked to the size of the firm and thus suggest that profit maximisation may become less important as a firm grows in size, it is certainly possible for large firms to pursue profit maximisation vigorously given the right conditions, such as strong structures for holding management to account, or if mechanism are in place to give management and employees a direct financial interest in the profitability in the firm. This is the case in some large firms that use profit-related pay, or schemes which given employees substantial ownership of the company (share options schemes for employees, or bonuses paid in shares, for example).

13 AQA ECON3 JANUARY 2011 ESSAY 2 D Oligopolies are concentrated markets with a few firms sharing a large percentage of market supply, while a contestable market is one with low entry and exit barriers. Sunk costs (such as advertising or capital investments which cannot be recovered) and legal barriers creating statutory monopolies are examples of entry barriers which prevent markets from being contestable. I Oligopolistic markets may not operate efficiently if firms enjoy price-making powers. An This is especially likely if collusion occurs. Collusion offers firms the opportunity to limit the uncertainty generated by interdependence in oligopolistic markets. There is the potential for firms to operate as a joint monopoly, with the effect that output is squeezed and price is raised. As a result the price (which indicates the marginal benefit received by the last consumer) is raised above the marginal cost of production. This suggests that further units of the good could be produced and that these units would carry a net benefit to society. Collusive oligopoly is then seen as a source of inefficiency, creating a market failure and a deadweight welfare loss to society. This is illustrated in the diagram. An Diagram Collusive oligopoly may reduce efficiency I Making oligopolistic markets more contestable has the potential to improve the efficiency of the market. An This is because removing entry barriers allows the threat of potential new competition to act as a discipline on the conduct of incumbent firms. Incumbents are less

14 likely to collude if entry barriers are low, because collusion raises prices and creates supernormal profit, which acts as a signal for new firms to enter the market. Given that incumbents are unlikely to welcome new entry, this threat may cause them not to collude. I Indeed, it points towards the possibility of incumbent firms adopting entry limit pricing, pricing at a level sufficiently low to deter new entry. An If there were no entry barriers at all, this would imply pricing at a level where only normal profits were made. The result is a high output, low price combination more similar to the outcome of a competitive market than a monopolistic one. I A second method of improving the efficiency of oligopolistic markets is to put in place stringent methods to detect and prevent collusion between firms. Kn /Ap Formal collusive agreements such as quotas for output, market sharing and bid-rigging are illegal in the UK, for example. A range of penalties are available to the authorities, including fines of up to 10% of company turn over and jail sentences for company directors. Meanwhile, cases of implied or tacit collusion, where firms come to recognise that it is in their mutual interest to refrain from competing (without having entered into a formal agreement with each other) can be investigated to see if they operate against the public interest. If they do, then the authorities can put into place remedies to help the market to work more effectively, such as measures to help consumers switch more easily between utility providers, for example. I A third method of improving the efficiency of oligopolistic markets is to regulate prices in those markets, placing a ceiling on what firms are allowed to charge. An This involves the regulator trying to judge the price that would be charged if the market were competitive and to impose this on firms. Resource allocation would then be similarly efficient to that in competitive markets. Kn This was common in utility industries in the UK after their privatisation and still occurs in the water industry. Evaluation/final judgement (s) Making markets more contestable to improve their efficiency has been used extensively in the UK in past years. Kn/Ap Markets have been deregulated by removing statutory entry barriers. Examples include the gas and electricity markets, directory enquiries, financial services and bus services. The success of deregulation has been mixed, casting doubt on whether it can be considered as the best way of improving efficiency in oligopolistic markets. Kn/Ap In directory enquiries, for example, heavy branding has occurred and there is significant evidence that lack of consumer knowledge limits the effectiveness of competition. Consumers are apt simply to use the service of the best-known provider, leading to inelastic demand curves for firms, granting them monopoly power. I It should also be noted that deregulation can only remove statutory entry barriers, and not the costs that are associated with entering a market. I Dergulation could be supplemented by measures to prevent firms erecting artificial entry barriers, but there are many markets that it is not possible to make contestable due to the high natural entry barriers present. This

15 applies particularly to markets tending towards natural monopolies. So, there are some markets for which improving contestability cannot be the best measure. I There is evidence to suggest that the UK s current policy framework for deterring collusion in oligopolistic markets has been particularly effective. Kn/Ap The number of cases of formal collusion has declined over the years as high profile cases such as that of Hasboro games in collusion with Argos and Littlewoods, and BA and Virgin over fuel surcharges, have highlighted the risks of collusion to firms. The effectiveness of the policy has also been bolstered by the improved information that the authorities have been able to gather through their powers to conduct dawn raids and through the provision for the exemption from punishment of firms who blow the whistle on a collusive agreement. I Meanwhile, regulation of prices is only desirable if it is not possible to introduce actual competition or at least the threat of new competition into an industry. An It is very difficult for regulators to gain enough information to mimic the prices that would be charged in a competitive market and to judge whether firms are making excessive profits. I There is also the danger of regulatory capture, by which regulators may come to serve the interests of the firms they are meant to be controlling. Thus, it is not possible to reach a conclusion that improving contestability is the best way of improving efficiency in oligopolistic markets, because it is not possible to remove entry barriers in all markets and there are likely to be other obstacles to the efficient working of markets that limit the effectiveness of this policy. This argument is strengthened when one adds to the arguments already covered the fact that lack of consumer information and the existence of consumer inertia are present in many oligopolistic markets, especially those for utilities. Measures to improve efficiency should be taken in accordance with the particular circumstances applying to each market, with price regulation as a last resort, while it is particularly important that stringent measures continue to be taken to prevent collusion between firms.

16 AQA ECON3 JANUARY 2011 ESSAY 3 D/Kn Environmental pollution is widely considered as a negative externality, or spill-over effect, arising from economic activity. It is generally thought of as causing a misallocation of resources, such that more resources are allocated to those activities generating pollution than is economically efficient. Accordingly, environmental pollution is thought of as a market failure leading to the problem of resource degradation, whereby environmental resources (economically the factor of production known as land) become less productive. I Pollution of whatever form (air, water, noise or light pollution) can be thought of as creating a divergence between private and social costs of economic activity. An The third parties who suffer have no way of using the market to charge the consumers and firms who damage the environment leading to over-provision of those goods which generate externalities. This is labelled as the difference between the market outcome and the social optimum in the diagram below. An Diagram Pollution creates a deadweight welfare loss I A second reason for regarding environmental pollution as market failure is that the environment is often treated as a public good, when in fact it is not. An It is difficult to exclude economic agents from using the environment even if they have not paid to do so. Economic agents are rivals for using the environment, however, as its use by one does diminish its use value to others. I Despite the presence of a market failure, it is theoretically possible to use markets to tackle pollution problems. An The treatment of the environment as if it were a public good is associated with the lack of property rights over it. Were a complete allocation of property rights to occur, it

17 would be possible to internalise the externality, creating a market where one is currently missing. If those who own environmental resources can charge others for using them, then no externality exists and it is possible for market activity to generate socially optimal outcomes. E Such apparently simple solutions do not come without problems, however. Resources would have to be expended in enforcing the property rights allocated and it would be by no means easy to prove which economic agents had infringed the property rights of others and to what extent. Resources would also be spent in negotiating prices for the use of environmental resources and it is possible that regional monopolies over some resources might occur, creating a new market failure. There are also ethical concerns over allocating ownership of environmental resources. I Other market based solutions include tradable pollution permits ( cap and trade schemes), stopping short of full allocation of property rights. An Such permits allow firms who can control pollution cheaply to do so and then sell excess permits to those firms which find it more expensive. In this way, the most cost-efficient way of controlling pollution can be found. Such schemes have become more popular on an international basis and can be used to address an unequal international distribution of income, by giving more permits per head to poorer countries as part of the initial allocation. E Similar problems exist as with the allocation of property rights, however, in addition to some new ones. With pollution permits, it is necessary for governmental authorities to judge how many permits should be issued and to who, which inevitably means that political negotiations heavily influence the outcome. This is a potential source of government failure in that it is likely that it will be difficult to agree socially optimal constraints on pollution. Further, the trade of permits may lead to geographical concentrations of pollution which might prove in some cases to be more damaging than if pollution was more evenly spread. Evaluation/final judgement (s) So, it is difficult to imagine the market alone providing a solution to environmental pollution. Even if a market based policy were put in place it would require some policing from governmental authorities, if only in the form of the protection of property rights. Kn/Ap The difficulties facing market based policies are apparent from looking at the workings of the EU emissions trading scheme designed to limit carbon emissions, in which it has proven difficult to stabilise carbon prices at sufficiently high levels to persuade companies to take the long term investment decisions necessary to reduce pollution. The difficulties in reaching agreements between governments at international climate change conferences also suggests that putting the framework in place for the market to tackle pollution will be difficult. Despite this, market based solutions offer more promise than other possibilities such as taxation and regulation. An These are thought to be a less effective method of controlling pollution, because they apply to all firms equally, both those for whom controlling pollution is relatively cheap and those who find it more costly. I Whether market based solutions are employed or not, it is important that where pollution has got global implications, as with greenhouse gas emissions, that internationally coordinated solutions are put in place, as action by one government in isolation allows others to free-ride, reducing the chances of an effective solution.