TK5 Policy Instruments for Pollution Control (I)

Question 1

The Coase Theorem

Answer 1

• Private bargaining results in the economically efficient resolution of
  negative externalities, without the need for the government’s (economic or regulatory) intervention
• , as long as property rights are fully allocated (but regardless of the distribution of property rights across affected parties)

Question 2

Necessary Conditions for the Coase Theorem

Answer 2

• For the Coase theorem to hold, bargaining must be easy and
  inexpensive and deals must be easy to enforce.
• That is, transaction costs are ignorable.

Question 3

Overview of Policy Instruments

Answer 3

• Command-and-Control (CAC) or Prescriptive Regulations
• Economic Incentives

Question 4

Command-and-Control (CAC) defined

Answer 4

regulators mandate specific pollution control actions, offering firms limited flexibility in how to comply.

Question 5

Command-and-Control (CAC) or
Prescriptive Regulations types

Answer 5

• Two types (which may be combined):
• Technology standards
• Performance standards
• Usually combined with fines and penalties for noncompliance

Question 6

Technology Standards (CAC)

Answer 6

• Typically, specify a particular type of equipment that must be used.
• Advantage: relatively easy to verify
• Disadvantage: Very limited flexibility for the polluter

Question 7

Performance Standards (CAC)

Answer 7

• Typically, set the maximum emissions allowed (per unit of economic activity).

Question 8

Performance Standards Advantage

Answer 8

Advantage compared to technology standards: some flexibility for the polluter as to how to meet the standards, leading to reduced abatement costs.

Question 9

performance standards Disadvantage

Answer 9

• More information is needed for effective regulation.
• Difficult to verify and enforce compliance

Question 10

Key Features of CAC in Comparison to
Economic Incentives

Answer 10

• Centralisation of some of the pollution control decisions that could be made by polluters.
• limits polluters’ flexibility in how they meet targets
• lacks mechanisms ensure marginal abatement costs are equalized across firms

Question 11

Advantage of Command-and-Control

Answer 11

Greater certainty on how much pollution will actually be emitted, especially in regulating complex environmental processes.

Question 12

Disadvantages of Command-and-Control

Answer 12

• High informational costs
• weak incentives for innovation
• static structure
• limited dynamic efficiency (e.g. R&D)
• failure to meet the equi-marginal principle
• and no penalty for residual emissions.

Question 13

Social efficiency

Answer 13

• when MB= MAC
• represents the level of pollution control that maximizes net social welfare (total benefits minus total costs).

Question 14

cost-effectiveness (environmental tax)

Answer 14

• MAC is equal accross all pollutors
• policy is cost effective when it achieves a given level of environmental improvement at the lowest total cost