Chapter 5.3 Flashcards
What happens when there is a negative production externality?
The free market overallocates resources to the production of the good and too much of it is produced relative to the social optimum
Pigovian tax
An indirect tax imposed by the government on goods with negative production externalities
Policies used to correct negative production externalities
Pigovian taxes
Carbon taxes
Tradable merits
Carbon tax
A tax per unit of carbon emission on fossil fuels
What is the effect of carbon taxes?
Creates incentives for producers to reduce the amount of pollution they create by purchasing less polluting resources and to switch to less polluting technologies, reducing the size of the negative externality and increasing optimum quantity if iutput
Tradable permit
A policy involving permits to pollute issued to firms by a government or an international body
Advantages of market-based negative production externality policies
They internalize the externality
Taxes on emissions provide incentives to reduce the amount of pollution created or to switch to less polluting resources
Leads to lower pollution levels at a lower overall cost to society
Disadvantages of market-based negative production externality tax policies
Hard to identify what methods produce pollutants
Hard to identify which pollutants are harmful
Hard to value the harm
Hard to determine an appropriate amount of tax
Has affects on consumers
Disadvantages of market-based negative production externality tradable permits
Government has to decide what the maximum acceptable level is
Permits may be distributed in an unfair way
Examples of government legislation on negative production externalities
Restrictions on emissions of pollutants by setting a max level permitted
Requirements to install smokestack scrubbers to reduce emission
Banning the use of harmful substances
Issuing licenses or permits for particular activities
Prohibiting construction, industry or agriculture in protected areas
Restrictions on the quantity of logging
Restrictions in the form of quotas for fishing or size of shipping fleets or bans for specific areas or times
Establishment of protected areas for the protection of biodiversity and endangered ecosystems
Advantages of legislation and regulations for negative production externalities
Simple to put into effect and oversee
Can be effective
Can force firms to comply and reduce harmful activities
Disadvantages of regulation and legislation for negative production externalities
Do not offer incentives to reduce emissions by less polluting resources, increase energy efficiency or switch to alternate fuels
Can’t distinguish between firms that have higher or lower costs of reducing pollution
Requires information that is hard to gauge, making it only partially effective
Costs of monitoring and supervising violations
What does legislation and regulation do to the MPC curve for negative production externalities?
Moves it upward towards the MSC curve
Collective self-governance
The idea that people will take control of common pool resources and use them sustainably
Advantages of collective self-governance
Doesn’t need top-down policies from the government
Doesn’t need private ownership of resources
