Econ 201Chapter 10.ppt

Econ 201Chapter 10 Taxes, Standards and Tradable Permits Remedies for Negative Externalities Standards Permissible level of emissions for each factory in an industry (each industry gets same target), or Targets how much emissions must be reduced by each factory (again, same target for all) Taxes Direct tax on emissions Indirect on input/output if there is a direct correlation between input/output and pollution E.g., tax on gasoline, coal based on sulfur content Tradable permits Gives each firm the “right” to pollute to a certain level Firms are allowed to trade/sell permits Two Big Questions What is the optimal level of pollution? How should it be allocated among its sources (firms)? How Do We Set the Standard? Equate MC of damage To MC of abatement Comparing Standards Essentially all 3 approaches can theoretically be set to achieve an optimal standard MC[damages] = MC[abatement] In practice Hard to obtain accurate data on damages Standards have been set arbitrarily in all 3 cases Evaluating the Efficiency of Allocation? Economic Efficiency Does the policy result in meeting the standard in a least-cost manner? Administrative Cost Efficiency What are the monitoring, enforcement and other administrative costs? Flexibility: responding to changes in market dynamics, e.g., inflation, changes in demand? Self-adjusting or not? Comparison of Approaches Standards Can produce optimal level of pollution But setting same standard for all firms (and are not productively efficient, e.g. min cost) To set individual quotas: requires knowledge of each firm’s costs Provide no incentive for firms to reduce pollution below current “authorized” levels Have higher administrative costs Not only have to monitor emissions Enforcement costs: legal proceedings (time delays and expense) Not very flexible: regulatory process for changing standards Can not respond easily to changes in market conditions Require rewriting legislation, establishing new standards Comparison of Approache