2. Lecture 2 - Policy instruments I Flashcards
True or false: pollution taxes and tradable pollution permits are market based instruments.
True.
For which of the following pollutants would a market mechanism be effective?
A) Uniformly mixed regional pollutants
B) Uniformly mixed local pollutants
C) Nonuniformly mixed local pollutants
D) Nonuniformly mixed regional pollutants
A) Uniformly mixed regional pollutants
Which of the following pollution levels is the optimal level of pollution according to economists?
A) Unregulated market outcome
B) When the marginal damage of pollution is smaller than the marginal benefits
C) Pollution according to the equimarginal principle
D) Zero pollution
C) Pollution according to the equimarginal principle
Explain why command and control types of regulation may be inefficient.
- C&C may be inefficient when mitigation costs vary across firms
- C&C provides less incentive to reduce emissions further than the standard that has been set
True or false: marginal external costs are constant when MSC and MPC are parallel, so the MEC curve is a horizontal line.
True.
What is a “sink function”?
The ability of natural environments to absorb wastes and pollution.
True or false: the “optimal” level of production occurs when the externality is fully internalized, resulting in a lower level of production and a lower level of pollution
True.
What is the equimarginal principle?
The balancing of marginal costs and marginal benefits to obtain an efficient outcome.
What are the four basic policy approaches to pollution control?
- Pigovian taxes
- Transferable permits
- Emission standards
- Technology-based regulations
Name a pro and a con associated with emission standards.
Pro:
- Standards can specify a definite desired result
Con:
- A standard might be too lax or strict for different actors
- After firms meet a standard, they might have little incentive to reduce pollution further
Name an example of a technology-based measure to control pollution.
Catalytic converters to reduce tailpipe emissions.
Describe the Best Available Control Technology concept.
BACT is a pollution regulation approach in which the government mandates that all firms use a control technology deemed most effective.
Name a pro and a con of technology-based regulation
Pro:
- Enforcement and monitoring costs are relatively low.
- Technology-based approaches may offer a cost advantage due to standardization.
Con:
- If a firm invents a new technology for pollution control that increases costs, it may withhold the technology from regulators in order to avoid a requirement that it be adopted.
- Technology-based approaches are unlikely to be cost-effective because they do not provide firms with the flexibility to pursue a wide range of options.
True or false: individual firms are not required to reduce pollution under a market-based approach, but the regulation creates a strong incentive for action.
True
Name one disadvantage of pollution taxes.
It is very difficult to predict the total amount of pollution reduction that a given tax will produce
Name two ways in which the used number of emission permits can decrease.
- Other interested parties can strengthen pollution control by purchasing and retiring permits
- The overall number of permits issued can be retired
What are nonlinear or threshold effects?
Pollution damages that are not linearly correlated with pollution levels.
Define “local pollutants”.
Pollutants that cause adverse impacts only within the area where they are emitted.
Define “uniformly mixed pollutants” and provide an example.
Any pollutant emitted by many sources in a region resulting in relatively constant concentration levels across the region.
Example: greenhouse gases
Define “nonuniformly mixed pollutants” and provide an example.
Pollutants that cause different impacts in different areas, depending on where they are emitted.
Examples: lead, particulate matter, ground-level ozone
Define “hotspots” of pollution.
Locally high levels of pollution, for example, surrounding a high-emitting plant; hotspots can occur under a pollution trading scheme.
Define “cumulative/stock pollutant” and provide an example.
A pollutant that does not dissipate or degrade significantly over time and can accumulate in the environment.
Examples: carbon dioxide and chlorofluorocarbons
Define “flow pollutant”.
A pollutant that has a short-term impact and then dissipates or is absorbed harmlessly into the environment.
True or false: what makes global public goods different from other economic activities is that there exist only weak economic and political mechanisms for solving these issues efficiently and effectively.
True.
True or false: in real life, there is always a choice between either command and control and market based instruments.
False.
Environmental policy rarely is a choice between command and control and economic (market based) instruments: often a combination is used (policy mixes).
Name at least 3 economic criteria for selecting a policy.
- Effectiveness
- Efficiency/cost-effectiveness
- Equity
- Cost recovery
- Administrative complexity
- Enforceability
- Are there lobbies against it?
- Indirect effects
- Feasibility
- Acceptability
Name two examples of command and control.
- Emission standards
- Technology standards
- Bans & quotas
Name two examples of communication as a policy instrument
- Certification and labeling
- Education, moral suasion, nudges
- Voluntary action / covenants
Name two examples of economic/market-based policy instruments
- Taxes
- Subsidies
- Tradable permits
- Take-back schemes (deposit-refund)
Name 3 benefits of labeling
- Empowers people
- Promotes economic efficiency
- Stimulates market development
- Encourages improvement
- Encourages monitoring
Name 2 challenges associated with labeling
- Misleading or fraudulent claims can lead to consumer distrust
- Unfair competition
- Not always feasible
- Differences in methodologies and certification methods
When may C&C regulation be desirable? Name 2 reasons.
- When firms have similar MMC functions
- If there are emergencies or the optimal level of pollution is at or near zero (i.e. efficiency is not a priority but effectiveness is)
What is the socially optimal tax in case of externalities?
When the tax is equal to the marginal external costs in the social welfare optimum.
Why does it make sense to only put taxes on the least elastic products?
This will minimize distortion and dead weight loss.
What is the formula for welfare?
Consumer surplus + producer surplus + tax + external benefits - subdsidy - external costs
Why is a tax sometimes more efficient than a C&C measure?
With the tax, there continues to be a financial incentive to cut pollution costs. With C&C, there is no incentive after the target is reached.
What are the two functions of taxes?
- Allocative and regulating
- Revenue raising
