Chapter 17 Notes
1) An externality is internalized by making the producer of the externality pay for it. This would raise the cost of production by
the social cost and therefore the quantity produced would decrease to match the new higher price. This would prove to be
allocatively efficient, as the new equilibrium would take into account both private and social costs.
2) Direct pollution controls are often inefficient because they set only one cut off level of pollution. This completely disregards
the significant variance between ease and cost level that different firms have for pollution abatement. If a firm with lower expenses
were to take on some of the abatement, then total necessary resources would be reduced to produce the same outcome. This
would only be efficient if the marginal cost of all firms for pollution abatement were equal. In addition, monitoring and enforcing
direct controls is a costly process, which reduces the overall effectiveness.
3) Emission tax can internalize pollution externalities so that profit-maximizing firms will produce the allocatively efficient
amount of pollution abatement (tax adjusted for each firm not one set number).
Tradable pollution permits allow those firms with lower marginal costs of pollution abatement to take some of the burden
off of firms with high marginal costs of pollution abatement. So, profit-maximizing firms will reduce pollution until their marginal
abatement costs equal the price of pollution permits. The costs of a given amount of pollution abatement will be minimized.
4) Producers inevitably will hav