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    Government Policies

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    er_ankurpareek
    The document discusses different types of government policies to address market failures from negative externalities. It describes three main types: 1) Prescriptive regulation/command-and-control approaches that directly regulate firm behavior and technology standards. 2) Market-based policies like taxes and cap-and-trade programs that put a price on pollution and allow firms to trade allowances. 3) Information-based approaches like right-to-know laws and eco-labeling that provide information to consumers about pollution. The document also discusses how market-based policies can overcome market failures by forcing firms to internalize external costs through tools like Pigouvian taxes set at the level of marginal damage.

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    Government Policies

    Uploaded by

    er_ankurpareek
    35 views8 pages
    The document discusses different types of government policies to address market failures from negative externalities. It describes three main types: 1) Prescriptive regulation/command-and-control approaches that directly regulate firm behavior and technology standards. 2) Market-based policies like taxes and cap-and-trade programs that put a price on pollution and allow firms to trade allowances. 3) Information-based approaches like right-to-know laws and eco-labeling that provide information to consumers about pollution. The document also discusses how market-based policies can overcome market failures by forcing firms to internalize external costs through tools like Pigouvian taxes set at the level of marginal damage.

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    Policies regarding the governmental work

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    The document discusses different types of government policies to address market failures from negative externalities. It describes three main types: 1) Prescriptive regulation/command-and-control approaches that directly regulate firm behavior and technology standards. 2) Market-based policies like taxes and cap-and-trade programs that put a price on pollution and allow firms to trade allowances. 3) Information-based approaches like right-to-know laws and eco-labeling that provide information to consumers about pollution. The document also discusses how market-based policies can overcome market failures by forcing firms to internalize external costs through tools like Pigouvian taxes set at the level of marginal damage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    35 views8 pages

    Government Policies

    Uploaded by

    er_ankurpareek
    The document discusses different types of government policies to address market failures from negative externalities. It describes three main types: 1) Prescriptive regulation/command-and-control approaches that directly regulate firm behavior and technology standards. 2) Market-based policies like taxes and cap-and-trade programs that put a price on pollution and allow firms to trade allowances. 3) Information-based approaches like right-to-know laws and eco-labeling that provide information to consumers about pollution. The document also discusses how market-based policies can overcome market failures by forcing firms to internalize external costs through tools like Pigouvian taxes set at the level of marginal damage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    Types

    of Government Policies
    •  Markets are not always efficient; market failures.
    •  There is the need for intervention when the market fails.
    •  So Government intervention?
    •  Not yet!

    •  https://www.youtube.com/watch?v=ByXM47Ri1Kc

    •  Government intervention is costly and generate unintended


    consequences that make matters even worse.
    •  Coarse
    Coase Theorem/Creating Property Rights
    Coase theorem states that private bargaining will overcome negative
    externalities without the need for government intervention, regardless
    of how property rights are allocated.
    Creating property rights are effective in dealing with common resource
    problems. But have limitations:
    A crucial assumption underlying Coase theorem is that transaction cost
    is negligible.
    Negligible transaction cost means that:
    1.  Bargaining is easy and inexpensive
    2.  Deals are easy to enforce. Etc.
    But is that really the case in reality?
    Transaction costs are typically high when:
    a. a large number of people suffer the damages from externality.
    b. large numbers of firms contribute to the problem.
    c. when causation is difficult to establish
    Types of Government Policies
    Still needs government!

    •  We will discuss three main types of Government policies:

    •  A. Prescriptive Regulation/ Command and Control

    •  B. Market-Based Policies

    •  C. Information-Based Approaches
    Prescrip3ve Regula3on/Command and Control

    •  This set of policies focus on regulating the behavior or the


    performance of firms.
    •  A technology standard requires firms to use a particular pollution
    abatement technology. Eg. The Clean Air Act Amendments in1977
    required new electric power plants to install large scrubbers to
    remove sulfur dioxide from their flue gases.

    •  Performance standard involves regulators imposing a ceiling on the


    emissions an individual firm can release. This approach allows
    polluters a leeway to determine how they meet the emission ceiling.

    •  Real world regulation are often a hybrid of technology and


    performance standards. They are often called technology based
    performance standard.
    Market Based/ Incen3ve-Based Policies

    •  These policies incorporate market principles into government


    policies.
    •  There are two main categories:
    1. Priced Based: This involves the use of taxes and subsidies to put a
    price on pollution; forcing firms to recognize the social damages from
    production.
    2. Allowance Trading/ Cap and Trade: Government establishes total
    allowable quantity of pollution for a group of firms(firms in a particular
    industry). It then allocate allowances(tradable permits) corresponding to
    some unit of pollution. At the end of each year(determined period) firms
    must retire an allowance for each unit of pollution they have emitted
    during the year.
    Under cap-and-trade system, firms can trade allowance among
    themselves. Thus, if a firm finds it relatively expensive to reduce
    pollution, they can buy allowance from other firms that can.
    Informa3on Based Approach
    This approach work by providing information to the public about
    pollution associated with the goods and services they consume. The
    aim is to influence consumer and firm behaviors through information
    availability. There are two main approaches here:
    1. The right-to-know laws: Here, a law is passed that requires firms
    to provide information on pollution related to their production. Eg Toxics
    Release Inventory (1988) requires manufacturing facilities in the US to
    report their annual releases of toxic chemicals(300 specified toxic
    chemicals). The EPA makes the data publicly available. You can check
    the pollution problems in your neighborhood by visiting
    www.scorecard.org .
    2. Eco-labeling and Certification Programs: This provides
    consumers with information about how a product was manufactured.
    Through Ecolabeling and certification programs, consumers are
    informed about eco-friendliness of goods and services they consume.
    How Market-Based Policies Overcome Market
    Failure
    Pigouvian Tax
    How much should the tax be?
    Authur Pigou : A tax on pollu3on equal to the marginal damage at the
    socially efficient level of pollu3on will achieve the socially efficient outcome.
    Pigouvian tax which is set equal to marginal damage at the socially efficient
    level of pollu3on forces producers and consumers of pollu3ng goods to
    internalize the externality.

    That is, it will force producers and consumers to fully incorporate the costs of
    their ac3ons into their output and consump3on decisions.

    Pigouvian Tax eliminates dead weight loss

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