Problem Set 3 - Joshua Friedman 11/8/07 PAM 340 Problem Set...

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Joshua Friedman 11/8/07 PAM 340 Problem Set 3 1) A Pigouvian tax (define) is superior to a cap-and-trade system (define) in addressing the problem of a negative externality because a Pigouvian tax reduces the amount of the externality at the least cost. UNCERTAIN. A Pigouvian tax is a tax levied to correct the negative externalities of a market activity. A cap and trade system is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Pigouvian Taxes correct market failures when transactions costs are too high to expect the forces of the Coase theorem to fix the problem. Pigovian taxes allow truly distortionary taxes, either now or in the future, to be lower than they would otherwise be. Cap-and-trade offers incentives to companies so negative externalities don’t occur in the first place. Either can be more effective because each has it’s own benefits. 2) The work of Ronald Coase implies that the party creating a negative externality should bear the cost of controlling it . FALSE. Ronald Coase states that a negative externality is created by a lack of property
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Problem Set 3 - Joshua Friedman 11/8/07 PAM 340 Problem Set...

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