require each plant to cut emissions by 25% • corrective tax: Make each plant pay a tax on each ton of SO 2 emissions. Set tax at level that achieves goal.
CHAPTER 10 EXTERNALITIES 30 Market-Based Policy #1: Corrective Taxes & Subsidies Suppose cost of reducing emissions is lower for Acme than for US Electric. Socially efficient outcome: Acme reduces emissions more than US Electric. The corrective tax is a price on the right to pollute. Like other prices, the tax allocates this “good” to the firms who value it most highly (US Electric).
CHAPTER 10 EXTERNALITIES 31 Market-Based Policy #1: Corrective Taxes & Subsidies
CHAPTER 10 EXTERNALITIES 32 Market-Based Policy #1: Corrective Taxes & Subsidies Other taxes distort incentives and move economy away from the social optimum. But corrective taxes enhance efficiency by aligning private with social incentives.
CHAPTER 10 EXTERNALITIES 33 Example of a Corrective Tax: The Gas TaxThe gas tax targets three negative externalities:
Think! Think! Discussion Discussion question question Policy goal: Reducing gasoline consumption Two approaches: A. Enact regulations requiring automakers to produce more fuel-efficient vehicles B. Significantly raise the gas tax 34 Discuss the merits of each approach. Which do you think would achieve the goal at lower cost? Who do you think would support or oppose each approach?
CHAPTER 10 EXTERNALITIES 35 Market-Based Policy #2: Tradable Pollution Permits Recall: Acme, US Electric each emit 40 tons SO 2 , total of 80 tons. Goal: reduce emissions 25% (to 60 tons/month) Suppose cost of reducing emissions is $100/ton for Acme, $200/ton for US Electric. If regulation requires each firm to reduce 10 tons, cost to Acme: (10 tons) x ($100/ton) = $1,000 cost to USE: (10 tons) x ($200/ton) = $2,000 total cost of achieving goal = $3,000
CHAPTER 10 EXTERNALITIES 36 Market-Based Policy #2: Tradable Pollution Permits Alternative: • issue 60 permits, each allows its bearer one ton of SO 2 emissions (so total emissions = 60 tons) • give 30 permits to each firm • establish market for trading permits Each firm can choose among these options: • emit 30 tons of SO 2 , using all its permits • emit < 30 tons, sell unused permits • buy additional permits so it can emit > 30 tons
CHAPTER 10 EXTERNALITIES 37 Market-Based Policy #2: Tradable Pollution Permits Suppose market price of permit = $150 One possible equilibrium: Acme • spends $2,000 to cut emissions by 20 tons • has 10 unused permits, sells them for $1,500 • net cost to Acme: $500 US Electric • emissions remain at 400 tons • buys 10 permits from Acme for $1,500 • net cost to USE: $1,500 Total cost of achieving goal: $2,000
CHAPTER 10 EXTERNALITIES 38 Market-Based Policy #2: Tradable Pollution Permits A system of tradable pollution permits achieves goal at lower cost than regulation.
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- Fall '09
- Externalities, Market failure, DICK, Externality