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ECON 208 (113)
Chapter 17

ECON 208 Chapter 17: ECON 208 Chapter 17

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Economics (Arts)
ECON 208
Paul Dickinson

The Economics of Environmental Protection Acts of production/consumption generate pollution (negative externality) *A negative externality implies that a competitive free market will produce more output than the allocatively efficient level; if the externality can be internalized, allocative efficiency can be achieved • Allocative efficiency: price (value consumers place on marginal unit of output) = marginal social cost (the value of resources society gives up to produce the marginal unit of output) • Negative externality: Social marginal cost > private marginal cost • Internalizing the externality: a process that results in a producer or consumer taking account of a previously external effect • The socially optimal level of output is such that the social marginal cost equals the social marginal benefit The Optimal Amount of Pollution Abatement • Eliminating all pollution is generally not allocatively efficient • Graph: Q*, MB and MC of abatement are equal • MC - rises steeply at a point • MB - gets smaller with lower levels of pollution 17.2 Pollution Control Policies Direct controls • Most common in US/CA • Regulations/standards for emissions • Prohibition of certain behaviours • Pollution is being reduced at the lowest possible cost when the marginal cost of pollution abatement is the same for all firms • Requiring equal amounts of pollution abatement from different polluters is inefficient when the different polluters have different technologies of pollution abatement • Direct pollution control are inefficient bc they do not minimize the total cost of a given amount of pollution abatement Emission Taxes • Tax on each unit of pollution --> firm is forced to internalize externalities • Firms will abate pollution until the MC = tax • Emissions taxes lead profit-maximizing firms to abate pollution in a cost-minimizing manner. If the tax is set equal to the marginal external cost of the pollution, the externality will be fully internalized and the allocatively efficient amount of pollution abatement (and output) will be produced • Problems: measuring and regulating emissions and setting the tax rate Tradeable Pollution Permits: "Cap and Trade" • Rights to emit specific amounts of specified pollutants that private firms may buy and sell among themselves. The total quantity of permits is set by the government • With tradable pollution permits, profit-maximizing firms will reduce pollution until their marginal abatement costs e
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