Corrective taxes subsidies align private incentives

This preview shows page 21 - 27 out of 41 pages.

Corrective taxes & subsidies align private incentives with society’s interests make private decision-makers take into account the external costs and benefits of their actions move economy toward a more efficient allocation of resources.
Image of page 21

Subscribe to view the full document.

EXTERNALITIES 22 Corrective Taxes vs. Regulations Different firms have different costs of pollution abatement. Efficient outcome: Firms with the lowest abatement costs reduce pollution the most. A pollution tax is efficient: Firms with low abatement costs will reduce pollution to reduce their tax burden. Firms with high abatement costs have greater willingness to pay tax. In contrast, a regulation requiring all firms to reduce pollution by a specific amount not efficient.
Image of page 22
EXTERNALITIES 23 Corrective Taxes vs. Regulations Corrective taxes are better for the environment: The corrective tax gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax. If a cleaner technology becomes available, the tax gives firms an incentive to adopt it. In contrast, firms have no incentive for further reduction beyond the level specified in a regulation.
Image of page 23

Subscribe to view the full document.

EXTERNALITIES 24 Example of a Corrective Tax: The Gas Tax The gas tax targets three negative externalities: Congestion The more you drive, the more you contribute to congestion. Accidents Larger vehicles cause more damage in an accident. Pollution Burning fossil fuels produces greenhouse gases.
Image of page 24
A C T I V E L E A R N I N G 2 A. Regulating lower SO 2 emissions Acme and US Electric run coal-burning power plants. Each emits 40 tons of sulfur dioxide per month, total emissions = 80 tons/month. Goal: Reduce SO 2 emissions 25%, to 60 tons/month Cost of reducing emissions: $100/ton for Acme, $200/ton for USE Policy option 1: Regulation Every firm must cut its emissions 25% (10 tons). Your task: Compute the cost to each firm and total cost of achieving goal using this policy. 25
Image of page 25

Subscribe to view the full document.

A C T I V E L E A R N I N G 2 A. Answers Each firm must reduce emissions by 10 tons. Cost of reducing emissions: $100/ton for Acme, $200/ton for USE. Compute cost of achieving goal with this policy: Cost to Acme: (10 tons) x ($100/ton) = $1000 Cost to USE: (10 tons) x ($200/ton) = $2000 Total cost of achieving goal = $3000 26
Image of page 26
A C T I V E L E A R N I N G 2 B. Tradable pollution permits Initially, Acme and USE each emit 40 tons SO 2 /month. Goal: reduce SO 2 emissions to 60 tons/month total. Policy option 2: Tradable pollution permits Issue 60 permits, each allows one ton SO 2 emissions. Give 30 permits to each firm. Establish market for trading permits. Each firm may use all its permits to emit 30 tons, may emit < 30 tons and sell leftover permits, or may purchase extra permits to emit > 30 tons. Your task: Compute cost of achieving goal if Acme uses 20 permits and sells 10 to USE for $150 each.
Image of page 27
You've reached the end of this preview.
  • Spring '09
  • changyutan
  • Market failure, DICK, Externality

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern