Answers 23 Goal reduce emissions from 80 to 60 tons Cost of reducing emissions

Answers 23 goal reduce emissions from 80 to 60 tons

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Answers 23
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§ Goal: reduce emissions from 80 to 60 tons § Cost of reducing emissions: $100/ton for Acme, $200/ton for USE. USE § buys 10 permits from Acme, spends $1500 § uses these 10 plus original 30 permits, emits 40 tons § spends nothing on abatement § net cost to USE = $1500 Total cost of achieving goal = $500 + $1500 = $2000 Using tradable permits, goal is achieved at lower total cost and lower cost to each firm than using regulation. A C T I V E L E A R N I N G 2 B. Answers , continued 24
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EXTERNALITIES 25 Tradable Pollution Permits § A tradable pollution permits system reduces pollution at lower cost than regulation. § Firms with low cost of reducing pollution sell whatever permits they can. § Firms with high cost of reducing pollution buy permits. § Result: Pollution reduction is concentrated among those firms with lowest costs.
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EXTERNALITIES 26 Tradable Pollution Permits in the Real World § SO 2 permits traded in the U.S. since 1995. § Nitrogen oxide permits traded in the northeastern U.S. since 1999. § Carbon emissions permits traded in Europe since January 1, 2005. § As of June 2008, Barack Obama and John McCain each propose “cap and trade” systems to reduce greenhouse gas emissions.
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EXTERNALITIES 27 Corrective Taxes vs. Tradable Pollution Permits § Like most demand curves, firms’ demand for the ability to pollute is a downward-sloping function of the “price” of polluting. § A corrective tax raises this price and thus reduces the quantity of pollution firms demand. § A tradable permits system restricts the supply of pollution rights, has the same effect as the tax. § When policymakers do not know the position of this demand curve, the permits system achieves pollution reduction targets more precisely.
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EXTERNALITIES 28 Objections to the Economic Analysis of Pollution § Some politicians, many environmentalists argue that no one should be able to “buy” the right to pollute, cannot put a price on the environment. § However, people face tradeoffs. The value of clean air & water must be compared to their cost. § The market-based approach reduces the cost of environmental protection, so it should increase the public’s demand for a clean environment.
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EXTERNALITIES 29 Private Solutions to Externalities Types of private solutions: § Moral codes and social sanctions, e.g., the “Golden Rule” § Charities, e.g., the Sierra Club § Contracts between market participants and the affected bystanders
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EXTERNALITIES 30 Private Solutions to Externalities § The Coase theorem : If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own.
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EXTERNALITIES 31 The Coase Theorem: An Example Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor. The socially efficient outcome maximizes Dick’s + Jane’s well-being. § If Dick values having Spot more than Jane values peace & quiet, the dog should stay. Coase theorem: The private market will reach the efficient outcome on its own… See Spot bark.
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EXTERNALITIES 32 The Coase Theorem: An Example § CASE 1: Dick has the right to keep Spot.
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