Direct Regulation Flashcards
what are the 5 externalities?
- public good/bad: biodiversity/ecosystem
- renewable resource and timing of its exploitation (user cost)
- information
- knowledge technological change
- transnational
what are the 4 types of regulation?
- private solutions
- direction regulation
- incentive-based regualtion
- hybrid
basic meaning of private solutions
-Intrinsic motivation, moral suasion, Coasian bargaining
basic meaning of direct regulation
- Command-and-control
– Standards on technology, process, performance
basic meaning of incentive based regulation
- Also called market-based
– Extrinsic motivation
– A conservation policy that creates a price for pollution;
– Price public bad and hence give cost to residual public bad
basic meaning of hybrid
- Liability laws
– Combination of direct and incentive-based
what is coase theorem?
- private solution
- impacted parties voluntarily negotiate among themselves
when would coase theorem be an optimal solution?
- if minimum transactions and information costs
- regardless of who has the “property right” (polluter or beneficiary) however distribution of net benefits differs
what is direct regulation?
- command and control
- regulate behavior directly through standards
what is a standard?
-limitation on behavior on a producer (or consumer)
what does direct regulation have standards on?
- technology
- process
- performance
what is the technology standard?
-a requirement to use a specific technology and or operating conditions
what is the process standards?
-a restriction on the use of an input to production
what is the performance standards?
-a standard requiring achievement of a target, but not specifying how the target is to be met
what are the implications of coase theorem?
- If markets are incomplete, people can
negotiate and efficient outcome will result; - no need for government intervention;
- outcome is independent of initial
assignment of rights.
transactions & information costs of coase theorem
- it works only when no trouble reaching and enforcing an agreement
- means minimal transactions and information costs necessary
how does coase theorem differ from real world?
- well defined property rights (bargaining cant occur without them)
- it can break down high bargaining costs, asymetric information, and weak, uneforced property rights (which is why govt often plays a role)
who receives the property right?
- Holder of property right receives the rent.
- internationally, polluter (upstream emitter
of external cost/benefit) holds right, not
recipient.
what is public direct provision?
govt provides the public good
- parks, reserves, and protected areas
- pure or impure public good
basic process vs performance
- performance standards direct
- process standards indirect
- performance standard generates stronger incentives
efficiency and equi-marginal prinicple
- direct regulation violated equi-marginal principal
- conservations costs vary across producers & conserving agents
what are examples of technology standards?
Examples:
• Catalytic converter for smog
• Mileage (CAFÉ) standards for automobiles
• Circle hooks and mackerel-type bait for
longliners to lower sea turtle interactions and
mortality
• Turtle excluder devices for shrimp trawlers
• Double-hulled oil tankers to prevent oil spills
what are the pros of technology standards?
- Effective, even if not cost-effective
- Among most easily accepted and
implemented regulations - Often monitored and verified with
comparatively low costs and ease
what are the cons of technology standards?
1. Not cost-effective, violates equi- marginal principle 2. Freeze technology into place 3. Require frequent revision – But in practice regulations and legislation tend to lag. 4. No incentives to further innovate to conserve – Called dynamic incentives-
what are examples of process standards?
Examples:
– Time-area closures
– Limits on frequency or amount of fishing effort
what are performance standards and targets?
- A standard requiring achievement of a target, but not
specifying how the target is to be met. - Often used for public bads or undesirable joint outputs
from common resources or (impure) public goods
what are examples of performance standards and targets?
Examples:
• Quotas, Total Allowable Catches (TACs)
• Emission limits
• Require each firm to abate the same amount of
pollution, e.g. 20 units
• Limited number of takes of sea turtles under
Endangered Species Act
cons of performance standards and targets
- Not least-cost, violates equi-marginal
principle - Costly to enforce
- Doesn’t generate direct conservation
incentives
– Instead perverse incentives for firms to
circumvent
pros of performance standards and targets
Pros:
- Mandates give clear directives to
firms that are easy to follow and
assure some level of reductions
what are the 2 main limits to direct regulation?
- limits information and flexibility
2. no price & cost on residual public bad
direct regulation: limit information and flexibility
One size fits all
– Limits producer flexibility to conserve
• Limits information available for
conservation
– Does not use all producer information on how
to reduce biodiversity losses
direct regulation: no price and cost on residual public bad
- Does not price and hence cost residual public
bad (e.g. remaining bycatch)
• Cost of residual public bad not factored into
price of private good (e.g. swordfish) and
hence costs of production.
– Thereby fails to fully impact producer and
consumer behavior and decision-making.
• Scale of production and consumption of both
private good and public bad too high
• Ratio of public bad : private good too high
