hw6soln - PADP 8670 Fertig Fall 2011 UGA Homework 6...

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Unformatted text preview: PADP 8670 Fertig Fall 2011 UGA Homework 6 Solution Even in the absence of global warming, some economists and policy analysts have been arguing for a cap-and-trade system for limiting CO2 emissions in the United States and worldwide. Other economists are arguing for Pigouvian taxes to internalize the pollution externality. Read the attached article and write a 1 page discussion of the differences and similarities between the two programs. Similarities - Both discourage emissions by making firms pay the cost of the negative externality. - Both will lead to higher output prices. - Both can provide revenue to the government. Differences - Tax requires the govt to figure out the correct tax rate to achieve the optimal output; cap and trade requires the govt only to choose the allowable emissions amount. - Tax is administratively simplier (just set the tax); cap and trade requires setting up a market for trading pollution permits. - Tax can be applied to firms and households nationwide; cap and trade is only feasible for firms in particular industries. - Firms will know the cost if the government announces a tax; firms may face uncertainty over time about their costs under cap and trade. ...
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