1423class19

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

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 14.23 Government Regulation of Industry Class 19: Environmental Regulation MIT & University of Cambridge 1 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 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 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 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 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 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....
View Full Document

Page1 / 23

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

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online