Sometimes market activities (production, buying, and selling) have unintended po

Question

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are called externalities. As a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant, answer the following questions: 1) what two policies could you use to reduce the total amount of emissions? 2) why do you think they each would work? 3) what would the benefits of each action be (besides emissions reduction)? 4) what would the costs of each action be? 5) How would you decide what was the best level of emission reduction? Can someone help me out please???

Explanation / Answer

Emissions are a classic example of an externality- something which is either a cost or a benefit not transmitted through price. For instance- the gasoline company charges X dollars for their gas, which the consumer buys and uses. But that amount of gas harms the public (you and I) a certain amount too- which is not reflected in the price of the gas........... There are a number of ways proposed to solve externalities. One is called a Pigouvian Tax- which taxes either the producer or consumer of the product which causes the externality an amount which is equivalent to the amount of damage caused by the product. In this example- let us say that one gallon of gas consumed causes $5 of harm to the environment. The government could therefore impose a tax of $5 dollars for every gallon of gasoline either sold or consumed. This would internalize the externality so that the number of gallons of gas either consumed or sold would be reduced........... Another way is to distribute a certain amount of "rights" to pollute the environment. Each firm will be given X number of gallons of pollution allowed per year, and if their amount of pollution exceeds their rights, they will be fined. There is, however, an option for firms to buy and sell some or all of their rights, which means that all emissions caused by the firm is either a "right" they had to buy, or one they could have sold-- thereby internalizing the cost of emissions- making them costly on the producers of gasoline........................ Those who use more green methods in their everyday life or for their company as a whole. For example, if a company uses solar power to power their offices could be rewarded with tax breaks or a point gaining system. Such systems are used for less frequently than penalty systems but could prove more popular and encourage people to make a change. Penalty systems are currently in order to control many factors, including emissions. One of the main penalty methods is pigouvian tax. The consumer or producer involved in negative externalities. An example of this would be in the case of petrol. For example, if it was found that a gallon of fuel caused damage to the environment the government could impose taxes per gallon would hopefully deter people from over usage or waste as they are being charged more, and secondly, the money made from tax could be used for their emission reducing projects..................... Emission taxes and tradable permits provide incentives to create and use technology that emits less pollution new technology that lowers the socially optimal level of pollution..................The cost of he tradable permits would be the opportunity cost of the one ton of emission you are selling. If your company is able to reduce their emissions and free a permit, then they are able to sell that permit to another company. The cost of the emission tax option would target the pollution directly by controlling the production.............................Think in terms of $$. With gas at $3.80/gal. and not likely to go down unless the recession comes back it would be a good idea to make as small a vehicle as you can manage for your next purchase. I know someone will say they need a 4 ton vehicle for work, but for most people they don't. I get 30 mpg with my vehicle and am thinking of buying a small motorcycle that can get over 100 mpg for trips to the store and such. When gas gets up to $5/gal or more it will pay for itself. Plus, I won't put as much wear and tear on my foul weather vehicle (truck) I use now. I know people are sick of hearing about light bulbs, but it's a fact- CFL's save money over their lifetime (and cut mercury emissions too). Same for high efficiency appliances. Insulation- a very cheap way to save lots of money and lots of energy (emissions). Insulate everything! Walls, floors, roof, water heater.... Don't bother going overboard though, it will cost you more and not make that much of a difference. A hundred thousand dollar electric vehicle is more of a status symbol than a useful emissions reducer. A high efficiency dryer is more costly and uses more energy than a clothes line. Over insulating your house will cost much more than the savings it gives and that insulation isn't all that great for the environment either.

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