2. Correcting market malfunction

Even in an intervention-free market, there will be high pollution led by externalities, a phenomenon we call market malfunction. This is the reverse of a distorted market. In a malfunctioning market, the government is supposed to play a part to internalize the so-called externality, a role it failed to accomplish.

Conventional coal taking up too much of the nation's energy structure, and the high growth of private transport are both obvious signs of a malfunctioning market. But in the case of coal consumption, the market supply-demand relationship would not consider the "negative externalities," i.e. pollution and the consequent damage to human health; instead, the market is only capable of ensuring the maximum profit for the producer and the maximum effect for the consumer.

To acknowledge this situation, the government has to use administrative leverage - such as raising taxes and fees concerning the use of coal - to reduce production and consumption.

The same administrative leverage could be applied to suppress the excessive growth of car consumption. Local governments in some cities have already started limiting the number of new plates issued in a year - either through lottery schemes or auctions - to ease congestion and air pollution.

By contrast, insufficient investment on clean energy is another typical case of "malfunctioning market." Everyone understands that clean energy can reduce the sulfur dioxide and nitrogen oxide emissions - the main component of PM2.5 - by up to 90 percent. But one "positive externality" of clean energy is that neither the producer nor the consumer is the direct beneficiary of emissions reduction, a factor that hinders the interest in clean energy to grow rapidly. At the same time, the government is still yet to increase subsidies in this sector to facilitate the use of clean energy.

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