Policy instruments for pollution control Flashcards
(20 cards)
The Coase Theorem
against government intervention
private bargaining results in the efficient resolution of negative externalities (as long as property rights are fully allocated)
bargaining isnt always easy there is transaction costs
Prescriptive regulations (command and control) - often a mix of both standards
Performance and technology standards (COMMAND AND CONTROL) - focuses on regulating behaviours
Technology standards
requires the use of pollution abatement or production methods e.g. The Clean Air Act 1977 required the use of scrubbers
no flexibility but easy to verify
Performance standards
Imposes a ceiling on the likes of air emissions gives leeway on how to achieve these
some flexibility but difficult to enforce and regulate
Market based (economic incentives)
incorporate government principles into government policies (more decentralised so will focus on pollution as a whole)
Emissions taxes
Set by government and companies will pay for each unit of pollution they emit, this forces polluters to recognise social damages and therefore internalises the costs of externalities and removes it
firms minimise total costs by choosing e or a (minTAC(ai) + t(emaxi-ai) cost effective
socially efficient where MAC(ai) = t
Subsidies
paying the firm money for units of abatement
Allowance trading (cap and trade)
Government establishes a cap designed to limit the total amount of emissions (based on total amount of pollution) then allocates annual permits/allowances to companies in the form of ‘tradable permits’ these must be freely distributed or sold in auctions
an alternative to the carbon tax
companies are penalised if they produce a larger amount of emissions
firms can buy permits from other firms that can emit at a lower cost
over time companies will have an incentive to invest in better technology
price of an allowance in a cap and trade system will equal the efficient tax
cost effective point where MAC = p
socially optimal point where regulator can set cap MAC = MB
example the EU-ETS allowance cap 2.3 billion metric tonnes
Ecolabelling and certification programme
a voluntary programme which provides consumers with information on how a product was made in an attempt to overcome asymmetric information
Comparing CAC to Incentive based
centralisation (CAC) of some pollution control decisions, restricts polluters choice and lacks controls mechanism for equalising marginal control costs
Advantages of CAC
greater certainty over how much pollution will be emitted
Disadvantages of CAC
high information costs
reduced incentives to find better ways of pollution control
hard to satisfy equi-marginal principle
only pay for pollution control not the damage that still occurs
Pigovian Tax
A tax on economic activities that generates negative externalities (creates costs that are borne by third parties)
the tax is intended to correct an inefficient market outcome internalising the externality
the tax = the social cost of the negative externalities (in which is not covered by the private cost of the activity)
pigovian subsidy may be used for positive externalities
a pigovian tax should eliminate the dead weight loss (size of the inefficiency)
an optimal tax will equal marginal damages
under a tax firms abate until the point where MC= T* (the level of abatement = X*) (more than this would mean this amount would cost more than paying the tax)
Subsidies
firm minimises net total costs by choosing e
MAC=s (cost effective)
optimal allocation S=MB
in the short run taxes and subsidies result in the same individual aggregate abatement
in the long run people can enter and exit so they are more likely to keep and attract people
demand for a public good
no demand as everyone free rides
supply exists if there is a MC
government can require a fixed quantity of pollution control
or may set a tax
Liability
the firm is liable for all incurred damages, makes them responsible for any consequences
provides an incentive for polluters to take the socially desirable level of precaution
Price vs Quantity under uncertainty (tax and cap and trade) ((tax and permits)) - if the government lack MAC
tax is preferred to CAT if there is a flat MB curve for example global warming policy
CAT is preferred to tax if there is a steep MB curve (Q>P for steep) as there is a smaller dead weight loss for example health based policy
regulation is sticky (cannot be unchanged) so MC becomes known
firms may be unwilling to disclose this information
tax = MD
DWL is different in both cases; under cap and trade amount of abatement is fixed (straight line)
under a tax abatement varies
weitzman rule - preferred policy has the lower DWL (when MC is uncertain it will depend on the slope of the curve)
uncertainty under MB does not matter
Advantages of economic incentives
requires less information
equi-marginal principle automatically holds
provides incentives to find cheaper ways
polluters pay for every bit of damage
Disadvantages of economic incentives
difficult to design - complex and needs to be practical
cap and trade may avoid huge transfers from polluters to regulators
incentives to invest in research and develop
Pollution hot spots
occur if the uniform mixing assumption fails
concentrated pollution in areas of high damage equal large abatement costs
need to look at alternatives such as varying the tax rate
