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10 - I The Role of Uncertainty Theory(continued Using the...

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I. The Role of Uncertainty: Theory (continued) Using the results we covered Monday, we began class deriving rules for the desired policy based on the slope of the marginal damage function (MDF): o When MDF is steeper, mistakes with quantity are more costly. Thus, regulation is a better option. o When MDF is flatter, a tax is better, because the tax represents MDF well. A third option is to combine permits with a “safety valve.” o One problem with the above analysis is that fees are rarely used. o Permits are more practical politically, but restrict quantity even if costs are high. o This proposal combines both features. o Implementation: Along with emissions targets, the government sets a “trigger price” (e.g. $25 per ton of carbon). If the price of permits rose above the trigger, the government would sell extra permits to maintain this price. o Political analysis Conservatives view it as a tax. Environmentalists fear stringent standards will not be met. II. Toxins Properties of toxins: 1. Toxins are found in small amounts. Also, it means that exposure to small amounts led to adverse health effects. Steep MDF implies quantity regulation is best. 2. Uncertainty is a concern Because health effects occur after repeated exposure, establishing links between exposure and health is difficult. Because toxins occur in small amounts, monitoring is difficult. 3. Generally synthetic or inorganic and persist for a long time Therefore, a stock pollutant. Market failures related to toxins. 1. Externalities Firms don’t account for social costs of disposing wastes. Particularly difficult because toxins are a stock pollutant. Therefore, MDF increases over time. 2. Imperfect information If people choose to accept risks of consumption, it is not a market failure. However, are people able to assess risk properly? Risk perception is a problem. Therefore, government may mandate that information be provided (e.g. warnings on cigarette packages). Risk may be to future generations, who are not currently represented in the market.
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III. Policies for Toxins To deal with the externalities problem, command and control regulation of toxins is often desirable, as threshold effects are a concern.
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