4. Regulation and the equimarginal principle Flashcards
What is public interest theory?
It views the purpose of regulation as the promotion of public interest where there is market failure to deliver an optimal or preferred outcome
What are the three broad categories of regulation?
- Prescriptive regulations
- Economic incentive based - regulations
- Information provision regulations
What are the advantages of prescriptive regulations?
- Greater certainty
- Low program costs
What is a carbon tax?
A fee per unit of pollution
What are the disadvantages of prescriptive regulations?
- Firms have reduced incentives to find cheaper ways to control pollution
- Hard to satisfy the equimarginal principle
- Rebound effect
What is the rebound effect?
The reduction in expected gains from technologies that improve efficiency
(eg cheaper so increase use)
What are marketable permits?
Allow polluters to buy and sell the right to pollute
What are the disadvantages of incentive-based regulations?
- Can be difficult to assess effectiveness
- Difficult to adjust the level of incentive
What are the advantages of incentive-based regulations?
- low informational requirements
- better incentive to innovate
What does abatement mean?
Abatement means reducing pollution
How do a firms costs typically perform regarding abatement?
They increase with the quantity abated
They decrease with the level of emissions allowed
What does the equimarginal principle state?
The costs of reducing pollution by some quantity is lowest when the marginal costs of production reductions are the same across all polluters
What is meant by the marginal savings from emissions?
If firms are allowed to pollute, they save money from not having to implement cleaner technologies. Marginal savings are the additional dollars saved for each unit of pollution
