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1423class19 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 19: Environmental Regulation MIT & University of Cambridge± 1
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Outline • Basic Regulatory Instruments • Equivalence of instruments • Taxes vs Targets • Taxes vs Subsidies • Multiple source regulation and Permits • EPA and US emissions regulation • The Future of market mechanisms 2
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Basic Regulatory Instruments • Basic regulatory instruments – Command and Control – Economic Incentives • Taxes (fees) • Subsidies • Liability • Permits • Complications: – Space and time – Uncertainty – Efficiency vs cost effectiveness – Ambient differentiated vs emission differentiated regulation 3
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Coase Bargaining Game Illustrates the role of distribution in getting the efficient outcome: Basic example: company produces effluent which pollutes river: – Primary treatment of effluent = $100 (to company) – Water purification costs = $300 (to citizens) – Environmental damage = $500 (to citizens) Victim assigned rights. Maximum offer by company = $100, this does not compensate victim, therefore he refuses to accept and company installs treatment equipment. Polluter assigned rights. Maximum offer by citizens = $300, minimum offer acceptable to company = $100, therefore company gets $100 + $100 under symmetric bargaining. Outcome the same in both cases but distribution of benefits very different. Who prefers what? 4
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Command and Control Regulator specifies steps individual polluters must take. This can involve specifying maximum pollution rate from each Source (e.g. a smoke stack). EPA does this and tells industry what technologies meet standard. • This may be efficient if EPA has good information. Often it is combined with significant fines for non- compliance. Why would this have to be the case? Pros: certainty of outcome and simple monitoring and enforcement. Cons: No incentive to innovate, does not equalise marginal abatement costs (equi-marginal principle), not full internalisation. 5
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Economic Incentives Fees or Pigouvian taxes/subsidies (represent a MD cost and can be set equal to marginal abatement cost). Permits: buy and sell the right to pollute. Trading induces a price on the permit which then means the firm faces a MD cost). Liability: make firm liability for the environmental damage imposed by its actions e.g. in using producing hazardous waste. This gives firm incentive to reduce this. 6
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Economic Incentives Pros: incentives to innovate, polluter pays, equi- marginal principle is satisfied. Cons: do not handle time and space variation very well, hard to adjust over time to inflation or new information, leads to large transfers of wealth which creates political problems.
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