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Foundations of Macroeconomics: Consumers and Firms

There are other factors of an economy such as externalities; these are benefits or costs that are received by parties or human beings that are not involved directly in a transaction. External benefits are somewhat beneficial but external costs usually cause problems; these are usually caused by pollutants emitted from factories and other service providing plants. In this period of time, the world is undergoing universal climatic change due to human activities and their interaction with the natural resources and the environment.

Major pollutants are usually emitted by power plants, vehicles, and other products that contain chemicals that are referred to as pollutants. Power plants are necessary for us, because most of the modern things that we use today are powered by electricity. However, though electricity is beneficial it also causes indirect cost to our environment and to our health. Power plants emit major pollutants such as Sulfur dioxide (SO2), Nitrogen Oxide (NO2), Carbon dioxide (CO2), Carbon monoxide (CO), chlorofluorocarbons, nitrous oxides (N2O) and Methane (CH4).

These compounds are the major causes of the climate change, because these blocks the infrared radiation into the outer space and sends it back on the surface of the earth or it just simply lets solar

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radiation directly into the earth’s surface. Thus, emission should be reduced for the benefit of the coming generations (Cohen). Costs of Emission Reduction The reduction of emission produced by power plants is not an easy task. Careful analysis, methods and models are supposed to be done to be able to make the plan somehow beneficial to the service provider that upholds the program, thus, reducing also their costs.

Emission reduction programs usually needs large amount of money for the process of cleaning and reducing the emitted pollutants that their power plants emit. This is due to the high cost of modern technology and innovative contracts that are being uphold by the companies in reducing or abating the emissions. Another reason for this is that the reduction of emission would imply that there is a need to find substitutes for the raw materials. In the worst scenario, electricity cost would also rise due to the cost of emission reduction.

Thus, this will further proceed with other effects such as decline in the demand and supply for electricity (Carlin J. ). Deciding the Best Level of Emission Reduction There are various models of emission reduction; top-down models, bottom-up models, hybrid models and the new growth models. One of the best approaches in understanding emission reduction is through the hybrid model. In this approach, it analyzes the costs of emission reduction through understanding the effects of technology and innovation, including the supply of energy.

It is also a model that undeniably relies on the path of capital stock which means that it views the economy as inert. Thus, it implies that it chooses capital accumulation. Why is the Approach better than the others? Hybrid models are considered as more realistic, in which it offers more insights than the top-down models and bottom-up models. It is also more advantageous because it gives better economic importance than that of the other models of abating emission. Hybrid models also believe that the removal of existing inefficiencies is reasonable for the cause of climatic change.

However, reduction of greenhouse emissions is always costly because it affects the maximum welfare of the economy. Emission reduction is best in this approach because hybrid models do not care if the process in costly that is why it is rather advantageous. Although through various analysis it says that hybrid models do have less behavioral details and microeconomic foundations. Hence, it is still the best level of understanding emission reduction (Tol, Richard S J).


Cohen, b. N. H. a. J. Greenhouse Gases and Society [Electronic Version] from http://www. umich. edu/~gs265/society/greenhouse. htm. Carlin, J. (September 7, 2002) Environmental Externalities in Electric Power Markets: Acid Rain, Urban Ozone, and Climate Change [Electronic Version] from http://www. eis. doe. gov/cneaf/pubs_html/rea/feature1. html Tol, Richard S J. Modelling the costs of emission reduction: different approaches [Electronic Version] from http://uni-hamburg. de/Wiss/FB/15/Sustainability/Paje-Tol-paper1. pdf

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