Lecture 5

Question 1

What is the polluter pays principle (internalising/full cost pricing)?

Answer 1

The idea that the price of a good or service should fully reflect its total costs of production, including the costs of all resources used

Question 2

2 methods for full cost pricing?

Answer 2

Market based instruments (taxes/permits)

CAC (command and control measures)

Question 3

4 advantages of market based instruments?

Answer 3

Can correct market deficiencies generated by government and market failure
Cost-efficient
Harnesses power of market and self interests and channels it toward sustainable development
Can raise tax revenue

Question 4

Learn pollution (/green/pigovian) tax diagram?
Explain why the optimum tax falls where it does too

Answer 4

Now

Question 5

4 problems with pollution taxes?

Answer 5

Don’t FORCE firms to reduce pollution
Can’t limit pollution like you can with permits/CAC
Firms reluctant to pay - taxes harm competitiveness
Difficult to assess MEC tf difficult to set T* at right level (laffer curve)

Question 6

What are CAC measures?

Answer 6

Limits on pollution/env. damage tf fines imposed if limits are breached

Question 7

Learn diagram for physical limit on Q produced and explanation

Answer 7

Now

Question 8

With a maximum allowed Q to produce, why might a firm still go beyond this? How far will they go?

Answer 8

They will continue to expand production since the charge they pay will be less than their profit (MNPB) tf still making profit

Produce up to charge = MNPB

Question 9

What does a CAC measure incentivise firms to reduce production to?

Answer 9

Qc, not Qe

Question 10

Main disadvantage of CAC?

Answer 10

Inefficient

Question 11

Define MAC?

Answer 11

Marginal abatement cost = cost of cutting or abating one unit of pollution

Question 12

What happens if MAC>tax and MAC

Answer 12

MAC>tax: firms pay the tax and keep polluting

MAC

Question 13

Learn MAC diagram comparing TAX to STANDARD?

Answer 13

Now

Question 14

On MAC diagram up to what point will a firm abate pollution?

Answer 14

Up to MAC = T*

Question 15

Total abatement cost of CAC = ?

Answer 15

TAC(CAC) = 0aS2 + 0bS2 + 0cS2

Question 16

Total abatement cost of tax = ?

Answer 16

TAC(tax) = 0xS1 + 0bS2 + 0yS3

Question 17

Show that tax is more efficient to reduce pollution?

Answer 17

TAC(CAC) - TAC(tax) = ?

Tf

TAC(cac)>TAC(tax

Tf tax minimises cost of pollution abatement tf is more efficient

Question 18

2 political issues with taxes?

Answer 18

Firms reluctant to pay, and usually affected sectors have a strong lobby

Firms also claim taxes damage their competitiveness and harm economic growth

Question 19

One other issue with taxes?

Answer 19

In order to set optimum level T* we need to know the relationship between pollution emissions and environmental damage (MEC, which is difficult to estimate)