CAC Flashcards
CAC meaning
Command‐and‐Control regulations
involve the environmental regulator stipulating
the action that an individual firm or polluting
facility should take with regard to pollution
control or other environmental protection,
though the firm may have some limited flexibility
in how to meets the regulatory requirements.
Choosing Between Standards (Permits and Command & Control) or Fees When Control Costs Are Unobserved
Real-World Application:
Marketable Permits: Increasingly used in practice, allowing firms to trade the right to pollute within a set limit.
Emission Fees: Used less often but involve charging firms for each unit of pollution they emit.
Theory vs. Reality:
Full Information: In an ideal world where the regulator has complete information, both permits and fees would achieve the same outcome in controlling pollution.
Imperfect Information: In reality, when the regulator does not know the firm’s marginal abatement cost (MAC), permits and fees do not produce identical results.
Regulator’s Challenge:
Known Marginal Damage (MD): The regulator may know the environmental damage caused by pollution.
Unknown MAC: However, the regulator doesn’t know the cost the firm faces to reduce pollution, while the firm itself does know its MAC.
This makes it challenging to choose the most effective method (permits or fees) for controlling pollution without complete information.
Proposition (Weitzman ‘74) fee or permits ?
With uncertainty over MCs of emissions, quantity
regulations are preferred if MD are more steeply sloped
than MC from emissions; emission fees are preferred if
MC are more steeply sloped than MD.
Pareto Preferred Allocation
An economy is in a Pareto Optimal state when no other allocation of bundles in the
economy can make one person better off without at the same time making another
worse off.
Command and Control (C&C) methods have certain advantages that make them preferable in specific situations
Lower Monitoring Costs:
Reduced Need for Constant Monitoring: C&C regulations can lead to lower monitoring costs because they often involve setting specific technology or performance standards that are easier to check. For example:
Sporadic vs. Permanent Monitoring: C&C might only require sporadic or random checks to ensure compliance, rather than the continuous monitoring that might be needed with pollution taxes. This can reduce the overall cost of monitoring. By contrast, taxes based on emissions often require permanent monitoring systems to measure exact pollution levels for tax calculation.
Technology Standards: Some C&C regulations specify the use of certain technologies (like scrubbers on smokestacks) that automatically limit emissions. Once these technologies are installed and verified, they might not need constant monitoring, thereby saving on costs.
2. Better Suited When Efficient Level of Emissions is Near Zero:
Strict Emission Limits: C&C is more suitable in situations where the goal is to eliminate or nearly eliminate emissions. When the efficient level of emissions is close to zero, C&C can impose strict limits or even bans, ensuring that emissions do not occur. Market-based approaches, like taxes, may still allow some level of emissions because firms can choose to pay the tax rather than eliminate emissions completely.
3. Better Suited for Emergencies:
Immediate Action: C&C regulations can be more effective in emergencies when rapid action is needed to protect the environment or public health. For example, during a sudden spike in harmful emissions, a direct regulatory order to stop or limit emissions can be implemented quickly. This immediate response is more straightforward compared to adjusting tax rates or permit caps, which can take time to have an effect.
Adjusting for Cyclical Variations: Although emissions and their environmental impacts can vary cyclically (e.g., more pollution in winter due to heating), this is not necessarily a reason to prefer C&C over taxes. Tax rates can be adjusted to account for these variations. However, the simplicity of C&C in directly imposing limits makes it a more intuitive choice during unpredictable, high-risk situations.
Why Information Asymmetry is a Problem:
Different Objectives:
Regulator’s Objective: The regulator, such as the Environmental Protection Agency (EPA), aims to achieve pollution control at the lowest possible cost to society. This includes both the costs of reducing pollution and the damages caused by pollution.
Firm’s Objective: The firm, on the other hand, is primarily interested in maximizing its profits. It may resist regulations if they are perceived as too costly, even threatening to shut down if the cost of complying with pollution control measures is too high.
Impact of Different Objectives:
This conflict of interests leads to a regulatory problem. The firm might possess more detailed information about its pollution control costs and operations than the regulator does. Consequently, it might claim high control costs to avoid stringent regulations or higher emission fees. This can make it difficult for the regulator to set optimal pollution control measures that balance environmental protection with economic considerations.
The firm will choose the emission level (e) that minimizes its total cost what point is this
marginal abatement cost equals the emission fee 𝑟
