° The marginal social benefit of pollution is the additional gain to society as a whole from an additional unit of pollution. ° The socially optimal quantity of pollution is the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for. ° Left to itself, a market economy will typically generate too much pollution because polluters have no incentive to take into account the costs they impose on others. Costs and Benefits of Pollution Costs and Benefits of Pollution
38 The market economy is polluting? Private Solutions to Externalities Private Solutions to Externalities ° The economist Ronald Coase (Nobel Prize in Economics – 1991) pointed out that, in an ideal world, the private sector could indeed deal with all externalities. When individuals or firms do take externalities into account, they internalize the externality ° According to the Coase theorem (1960), even in the presence of externalities, An economy can always reach an efficient solution once property rights have been defined and when the transaction costs are sufficiently low. ° The costs of making a deal are known as transaction costs .
39 Policies Toward Pollution Policies Toward Pollution ° Environmental standards are rules that protect the environment by specifying actions by producers and consumers. Generally such standards are inefficient because they are inflexible. ° An emissions tax is a tax that depends on the amount of pollution a firm produces. ° Tradable emissions permits are licenses to emit limited quantities of pollutants that can be bought and sold by polluters. ° Taxes designed to reduce external costs are known as Pigouvian taxes . Environmental Standards versus Emissions Taxes
40 Pigouvian Tax and Pigouvian Subsidy ° Arthur Cecil Pigou (1877-1959): An emissions tax is a form of Pigouvian tax, a tax designed to reduce external costs. ° The effect of a Pigouvian tax is to make that private marginal cost plus this tax equals the marginal social cost. ° The Pigouvian tax does not generate any efficiency loss of markets, as internalize the externality costs for producers and consumers, rather than changing them. ° A Pigouvian subsidy is a payment designed to encourage activities that yield external benefits. Negative Externalities and Negative Externalities and Production Production
41 Positive Externalities and Positive Externalities and Consumption Consumption
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