436 Problem Set 4 Answers SU19.pdf

A explain why tradable permits would be a better

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A. Explain why tradable permits would be a better instrument to use than direct regulation of emissions. For aggregate pollution, tradable permits are better than direct regulation of emissions because both instruments will attain the same level of pollution but only tradable permits will minimize the cost of doing so. B. Explain why the polluting industry might prefer grandfathered permits to regulation, but regulation to auctioned permits. The industry will want to minimize its aggregate cost of reducing pollution, which includes both the cost of abatement and payments to government. Grandfathered permits would be preferred to regulation because neither would involve payments to government but the cost of abatement would be less for permits. Regulation would be preferred to auctioned permits because the saving in the cost of abatement with permits would most likely be less than the payments to government to buy the permits. C. Discuss which instrument is likely to be preferred by legislators. Regulations. Legislators tend to favor regulations because they are more familiar (more legislators are lawyers than economists); the perceived costs of regulation are usually less; strict regulations with little enforcement have symbolic value even when they are ineffective; permits involve more uncertainty about the distribution of gains and losses; and regulations are easier to control and to tailor for special breaks for supporters.
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