2. Lecture 2 - Policy instruments I

Question 1

True or false: pollution taxes and tradable pollution permits are market based instruments.

Answer 1

True.

Question 2

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

Answer 2

A) Uniformly mixed regional pollutants

Question 3

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

Answer 3

C) Pollution according to the equimarginal principle

Question 4

Explain why command and control types of regulation may be inefficient.

Answer 4

• 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

Question 5

True or false: marginal external costs are constant when MSC and MPC are parallel, so the MEC curve is a horizontal line.

Answer 5

True.

Question 6

What is a “sink function”?

Answer 6

The ability of natural environments to absorb wastes and pollution.

Question 7

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

Answer 7

True.

Question 8

What is the equimarginal principle?

Answer 8

The balancing of marginal costs and marginal benefits to obtain an efficient outcome.

Question 9

What are the four basic policy approaches to pollution control?

Answer 9

• Pigovian taxes
• Transferable permits
• Emission standards
• Technology-based regulations

Question 10

Name a pro and a con associated with emission standards.

Answer 10

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

Question 11

Name an example of a technology-based measure to control pollution.

Answer 11

Catalytic converters to reduce tailpipe emissions.

Question 12

Describe the Best Available Control Technology concept.

Answer 12

BACT is a pollution regulation approach in which the government mandates that all firms use a control technology deemed most effective.

Question 13

Name a pro and a con of technology-based regulation

Answer 13

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.

Question 14

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.

Answer 14

True

Question 15

Name one disadvantage of pollution taxes.

Answer 15

It is very difficult to predict the total amount of pollution reduction that a given tax will produce

Question 16

Name two ways in which the used number of emission permits can decrease.

Answer 16

• Other interested parties can strengthen pollution control by purchasing and retiring permits
• The overall number of permits issued can be retired

Question 17

What are nonlinear or threshold effects?

Answer 17

Pollution damages that are not linearly correlated with pollution levels.

Question 18

Define “local pollutants”.

Answer 18

Pollutants that cause adverse impacts only within the area where they are emitted.

Question 19

Define “uniformly mixed pollutants” and provide an example.

Answer 19

Any pollutant emitted by many sources in a region resulting in relatively constant concentration levels across the region.

Example: greenhouse gases

Question 20

Define “nonuniformly mixed pollutants” and provide an example.

Answer 20

Pollutants that cause different impacts in different areas, depending on where they are emitted.

Examples: lead, particulate matter, ground-level ozone

Question 21

Define “hotspots” of pollution.

Answer 21

Locally high levels of pollution, for example, surrounding a high-emitting plant; hotspots can occur under a pollution trading scheme.

Question 22

Define “cumulative/stock pollutant” and provide an example.

Answer 22

A pollutant that does not dissipate or degrade significantly over time and can accumulate in the environment.

Examples: carbon dioxide and chlorofluorocarbons

Question 23

Define “flow pollutant”.

Answer 23

A pollutant that has a short-term impact and then dissipates or is absorbed harmlessly into the environment.

Question 24

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.

Answer 24

True.

Question 25

True or false: in real life, there is always a choice between either command and control and market based instruments.

Answer 25

False.

Environmental policy rarely is a choice between command and control and economic (market based) instruments: often a combination is used (policy mixes).

Question 26

Name at least 3 economic criteria for selecting a policy.

Answer 26

1. Effectiveness
2. Efficiency/cost-effectiveness
3. Equity
4. Cost recovery
5. Administrative complexity
6. Enforceability
7. Are there lobbies against it?
8. Indirect effects
9. Feasibility
10. Acceptability

Question 27

Name two examples of command and control.

Answer 27

• Emission standards
• Technology standards
• Bans & quotas

Question 28

Name two examples of communication as a policy instrument

Answer 28

• Certification and labeling
• Education, moral suasion, nudges
• Voluntary action / covenants

Question 29

Name two examples of economic/market-based policy instruments

Answer 29

• Taxes
• Subsidies
• Tradable permits
• Take-back schemes (deposit-refund)

Question 30

Name 3 benefits of labeling

Answer 30

1. Empowers people
2. Promotes economic efficiency
3. Stimulates market development
4. Encourages improvement
5. Encourages monitoring

Question 31

Name 2 challenges associated with labeling

Answer 31

1. Misleading or fraudulent claims can lead to consumer distrust
2. Unfair competition
3. Not always feasible
4. Differences in methodologies and certification methods

Question 32

When may C&C regulation be desirable? Name 2 reasons.

Answer 32

• 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)

Question 33

What is the socially optimal tax in case of externalities?

Answer 33

When the tax is equal to the marginal external costs in the social welfare optimum.

Question 34

Why does it make sense to only put taxes on the least elastic products?

Answer 34

This will minimize distortion and dead weight loss.

Question 35

What is the formula for welfare?

Answer 35

Consumer surplus + producer surplus + tax + external benefits - subdsidy - external costs

Question 36

Why is a tax sometimes more efficient than a C&C measure?

Answer 36

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.

Question 37

What are the two functions of taxes?

Answer 37

1. Allocative and regulating
2. Revenue raising