As the Chinese economy gets more
developed the demand for cleaner water and air will increase, and the Chinese
people can afford to pay for it. In the long run, though not necessarily in the
near future, this favorable income effect should more than offset the
unfavorable effect of producing a large quantity of output as the experience of
the developed economies has demonstrated.
Since the control of
pollution resulting from production using existing technology is difficult, one
way for environment protection is to promote the use of clean energy by
reducing its price relative to the price of existing energy. This can be achieved by imposing a cost to
using polluting energy (which is hard to enforce) or by promoting technological
innovations for the development of clean energy, especially to replace the use
of coal. There are incentives in the free market for such innovations to take
place. In addition the government can promote such innovations by subsidy and
tax policies if it can identify them correctly.
One cannot depend entirely on a market solution designed
by the government to the problem of environmental degradation. Economy and
Lieberthal (2007) appeal to multinationals doing business in China to play a positive role in protecting China ’s
environment by setting an example for practicing environmentally friendly
production while impressing the Chinese government of such conduct in their pursuit
of profits. If it is to the
self-interest of the multinationals to do so, one wonders why this would not be
to the self interest of domestic Chinese firms also. If such an undertaking is
to their self interest why have the multinationals and Chinese domestic
enterprises have failed to do so? An
economist would question that the multinationals and the Chinese enterprises
are ignorant of their self-interests in this regard.
Three important current issues
In solving 
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