Direct Regulation

Question 1

what are the 5 externalities?

Answer 1

• public good/bad: biodiversity/ecosystem
• renewable resource and timing of its exploitation (user cost)
• information
• knowledge technological change
• transnational

Question 2

what are the 4 types of regulation?

Answer 2

• private solutions
• direction regulation
• incentive-based regualtion
• hybrid

Question 3

basic meaning of private solutions

Answer 3

-Intrinsic motivation, moral suasion, Coasian bargaining

Question 4

basic meaning of direct regulation

Answer 4

• Command-and-control

– Standards on technology, process, performance

Question 5

basic meaning of incentive based regulation

Answer 5

• 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

Question 6

basic meaning of hybrid

Answer 6

• Liability laws

– Combination of direct and incentive-based

Question 7

what is coase theorem?

Answer 7

• private solution

- impacted parties voluntarily negotiate among themselves

Question 8

when would coase theorem be an optimal solution?

Answer 8

• if minimum transactions and information costs

- regardless of who has the “property right” (polluter or beneficiary) however distribution of net benefits differs

Question 9

what is direct regulation?

Answer 9

• command and control

- regulate behavior directly through standards

Question 10

what is a standard?

Answer 10

-limitation on behavior on a producer (or consumer)

Question 11

what does direct regulation have standards on?

Answer 11

• technology
• process
• performance

Question 12

what is the technology standard?

Answer 12

-a requirement to use a specific technology and or operating conditions

Question 13

what is the process standards?

Answer 13

-a restriction on the use of an input to production

Question 14

what is the performance standards?

Answer 14

-a standard requiring achievement of a target, but not specifying how the target is to be met

Question 15

what are the implications of coase theorem?

Answer 15

1. If markets are incomplete, people can
   negotiate and efficient outcome will result;
2. no need for government intervention;
3. outcome is independent of initial
   assignment of rights.

Question 16

transactions & information costs of coase theorem

Answer 16

• it works only when no trouble reaching and enforcing an agreement
• means minimal transactions and information costs necessary

Question 17

how does coase theorem differ from real world?

Answer 17

• 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)

Question 18

who receives the property right?

Answer 18

• Holder of property right receives the rent.
• internationally, polluter (upstream emitter
  of external cost/benefit) holds right, not
  recipient.

Question 19

what is public direct provision?

Answer 19

govt provides the public good

• parks, reserves, and protected areas
• pure or impure public good

Question 20

basic process vs performance

Answer 20

• performance standards direct
• process standards indirect
• performance standard generates stronger incentives

Question 21

efficiency and equi-marginal prinicple

Answer 21

• direct regulation violated equi-marginal principal

- conservations costs vary across producers & conserving agents

Question 22

what are examples of technology standards?

Answer 22

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

Question 23

what are the pros of technology standards?

Answer 23

• Effective, even if not cost-effective
• Among most easily accepted and
  implemented regulations
• Often monitored and verified with
  comparatively low costs and ease

Question 24

what are the cons of technology standards?

Answer 24

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-

Question 25

what are examples of process standards?

Answer 25

Examples:
– Time-area closures
– Limits on frequency or amount of fishing effort

Question 26

what are performance standards and targets?

Answer 26

• 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

Question 27

what are examples of performance standards and targets?

Answer 27

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

Question 28

cons of performance standards and targets

Answer 28

1. Not least-cost, violates equi-marginal
   principle
2. Costly to enforce
3. Doesn’t generate direct conservation
   incentives
   – Instead perverse incentives for firms to
   circumvent

Question 29

pros of performance standards and targets

Answer 29

Pros:
- Mandates give clear directives to
firms that are easy to follow and
assure some level of reductions

Question 30

what are the 2 main limits to direct regulation?

Answer 30

1. limits information and flexibility

2. no price & cost on residual public bad

Question 31

direct regulation: limit information and flexibility

Answer 31

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

Question 32

direct regulation: no price and cost on residual public bad

Answer 32

• 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