Question: Assess 3 macro policies to reduce the impact of economic growth on the environment.
One macro policy that the government could use is supply-side policies. For example, the government could reduce corporation tax so that firms’ profits rise, allowing firms to increase investment in efficient and green technology. This should help reduce the impact of economic growth on the environment because firms will cause less damage by, for instance, dumping less toxic waste into rivers and pumping less harmful chemicals into the air.
However, there are time lags involved with supply-side policies. It takes time to invest, design, test and build new efficient and green technology. Also, there is no guarantee that firms will use their higher profits to invest in green technology, firms may use extra profits to increase pay for managers instead of investing in better technology.
Moreover, the government could use contractionary fiscal policy to help limit our damage on the environment. If the government reduce government spending and/or increase taxation then there are more leakages from the circular flow of income, AD falls, there will be less transactions in the economy and less cars/vans/trucks will be driven, so air pollution will fall. If there is less trade within the economy then firms will be producing less, meaning we extract fewer resources from the land, so damage to the geosphere is reduced.
On the other hand, the effectiveness of a contractionary fiscal policy depends on the magnitude of the fall in government spending. If government spending is only cut by a few million £ then there may be no significant positive impact on the environment at all. Also, this policy may be bad for consumers because incomes will fall, so consumption and living standards will be hit.
Furthermore, the monetary authorities could use tight monetary policy. For instance, if interest rates are increases then the cost of borrowing increases, consumption falls, investment will be discouraged, AD will decrease, firms will produce less and, therefore, there will be less toxic waste pumped into rivers and the air, so there will be less damage to the biosphere and atmosphere.
Although, a tight monetary policy may not be convenient if inflation is very low and below the monetary authorities’ target. If inflation is below target, a loose monetary policy would be needed to cut interest rates and boost AD. Raising interest rates and making inflation drop too low could lead to a serious problem of deflation.