Payment to improve environmental quality and business performance
Long-term environmental improvement can be encouraged by incentives in the form of one-off capital grants to encourage investment in more efficient and up-to-date technology to reduce materials and energy use and the generation of waste, or even to eliminate some activities entirely. Subsidies are essentially a negative tax and a recurrent form of investment grant. Both are made on the ground of enhancing social benefit by encouraging those conferring them to continue to do so and/or increase the quantity supplied. The problem with the use of grants and subsidies is that they can be extremely costly for government if open-ended. Moreover, there is no certainly that there will be a sufficiently large take-up where schemes offer less than the total cost. Such intervention distorts the cost structure of particular industries if the take-up uneven. It can also create international differentials, giving a competitive advantage to industries in countries where such instrument are applied in comparison with other in which they are not.
Economists’ attitudes to subsidies are somewhat ambivalent because they have been conditioned to be concerned with identifying and evaluating the unintended outcomes encouraging new entrants and existing, often inefficient, producers. For example, government support of farmers financially, to ensure they remain in business, has given to rise to over-production, over-use of resources and environmental degradation. Nevertheless, they are circumstances, particularly with respect to situation involving public goods and externalities, where grants and subsidies could be beneficial. For example, in an urban context, conversation of heritage building is supported by public sector capital grants and subsidies or tax breaks because it is recognized that the maintenance costs of such artefacts to occupiers and owners are much higher than for modern properties. In this sense the level of grants, subsidy or tax break is an implicit recognition of the social benefits generated by the built and natural environment.
The payments of grants or subsidies to do this can be demonstrated by referring back to the diagrammatic analysis in figure 9.4 in the previous chapter. Ignoring the MSC curve, if a vertical line is drawn from the intersection of the MPC and MSB curve to the quantity axis ( level of activity in figure 9.4) , it is clear that the quantity supplied is increased because it is to the right of OP, the private optimum where MR= MPC. To encourage this increase a subsidy, equal to the vertical distance between the MPC and MSC curves above the intersection of the MSB and MPC curves, is required as this meets the MPC of the increase in supply. In the context of tourism, such a subsidy might be paid where occupiers or conversation areas that are attractions in tourism destinations’ cities and towns. In some case historic building may be suitable for accommodation or facilities, such as bars and restaurants. Thus the level of both private and social benefits can be enhanced. Another important example is the change in agricultural policy in the European Union since the mid-1980s, whereby grants and subsidies are paid to farmers who farm in more traditional way and enter into environmental schemes, thus enhancing the appearance of the landscape and rural environment for wildlife and, where feasible, visitors.