Xid-7092699_2 - T hurs Oct 6 1 Corrective approaches to externalities and other market failures A Government intervention or regulation Under what

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T hurs., Oct 6 1 . Corrective approaches to externalities and other market failures : A. Government intervention or regulation - Under what circumstances, When? How? What are the costs? What are the benefits? - Direct government intervention Reforestation Restoration of contaminated sites (leaking gas tanks in Florida) Beach renourishment & restoration (about 50 projects in Fla.) Limits on level or amount of pollution; often by specific course or method. Example: An electric power plant may emit x pounds of sulfur dioxide (SO 2 ) per kilowatt hour; SO 2 must be controlled by use of 'scrubbers' (flue gas desulfurization) Characterized early SO 2 regulation in federal Clean Air Act Can be effective in reducing pollutants But often is demonstrably inefficient (not the least-cost way to achieve x pounds of reduction) Why? If marginal cost of abatement differs among sources, requiring all sources to emit the same amount (or reduce the same amount) will not be least-cost solution. When might command & control be efficient?
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When monitoring cost is high When optimal level of pollution near zero Named after Arthur Cecil Pigou Taxation on polluting activity, or subsidy for beneficial activity; taxes can reduce or eliminate the externality by fully 'internalizing' the costs of production. Tax set at level where marginal benefits of pollution reduction = marginal costs of reduction (abatement). Impose a tax equal to the external cost at a given level of Q: - External cost is 'internalized' by the tax - Increases marginal cost of production - Results in new equilibrium with lower Q and higher P Problems/questions: Should the tax be imposed on output, or on the pollutant (ie, carbon)? What is the efficient level of tax? Produces price signal indirectly Does tax reflect opportunity cost of a ton of emissions? Tax - set equal to point where marginal benefit of reduction = marginal cost of reduction When tax is greater than MC of reduction, firms will make reductions; when MC is greater than tax, firms will pollute (not abate) and pay tax. Q = optimal level of pollution B. Coase theorem Two participants: one who causes pollution, and one who is damaged.
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In absence of gov’t regulations, the two may negotiate to reduce or eliminate damages. Key aspects: property rights, and transaction costs.
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This note was uploaded on 04/05/2012 for the course ECP 3302 taught by Professor Staff during the Fall '11 term at Florida State College.

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Xid-7092699_2 - T hurs Oct 6 1 Corrective approaches to externalities and other market failures A Government intervention or regulation Under what

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