4. Understanding different policy options to correct for negative externalities

Question

4. Understanding different policy options to correct for negative externalities Carbon dioxide emissions have been linked to global warming. The following table lists some possible public policies aimed at reducing the amount of carbon dioxide in the air. For each policy listed, identify whether it is a command-and-control policy (regulation), tradable permit system, corrective subsidy, or corrective tax Command and- Tradable Corrective Corrective Permit PolicySystem Control Public Policy The government limits total carbon-dioxide emissions by all factories to 120,000 tons per decade. Each individual factory is given the right to emit 110 tons of carbon dioxide and factories may buy and sell these rights in a marketplace. The government orders every factory to adopt a new technology, which reduces carbon- dioxide emissions into the atmosphere The government agrees to reimburse all factories that purchase new, emissions- reducing technology in order to provide cleaner air. The government charges factories $400 for every ton of carbon dioxide they emit. Subsidy Tax

Explanation / Answer

1> Tradable permit system

A tradable permit system is a tool that allows the market to direct environmental efforts where a market does not naturally exist.

2> Command and control

Command and Control Regulation can be defined as “the direct regulation of an industry or activity by legislation that states what is permitted and what is illegal”.

3> Corrective subsidy

A payment from the government to the producers or consumers of a merit good, or one that creates positive externalities in its production or consumption.

4> Corrective tax

A corrective tax is a market-based policy option used by the government to address negative externalities.

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