Chapter 10 problems and applications 7. Many observers believe that the levels o

Question

Chapter 10 problems and applications

7. Many observers believe that the levels of pollutionin our society are too high.

a. If society wishes to reduce overall pollutionby a certain amount, why is it efficient tohave different amounts of reduction at differentfirms?

b. Command-and-control approaches often relyon uniform reductions among firms. Whyare these approaches generally unable totarget the firms that should undertake biggerreductions?

c. Economists argue that appropriate correctivetaxes or tradable pollution rights will resultin efficient pollution reduction. How dothese approaches target the firms that shouldundertake bigger reductions?

Explanation / Answer

(a) Since firms all generate pollution for different reasons and as the result of different types of activities, it is reasonable to believe that the amount of reducing will vary by firm. -So it is optimal for firms to pay the same amount in the effort to reduce pollution. However, even though firms may put the same amount of money towards reducing pollution, the level of pollution reduction will certainly vary. -This is efficient because it prevents over-penalizing firms who would find it very difficult to reduce their emmisions (b)Uniform reductions are those that require all firms to reduce their own pollution by the same amount. -This is ineffective in targeting firms that should undertake bigger reductions because it does not consider the cost or difficulty involve in reducing pollution for each firm. -Generally the firms that should undertake bigger reductions are those who can do it relatively easily compare to other firms - this way pollution is reduced at a lower overall cost. (c)corrective taxes penalize firms for every unit of pollution - only firms that would find it more expensive to reduce their emissions would opt for the tax. All other firms would take actions to reduce their pollution, which would be cheaper than paying this tax. Tradeable pollution rights impose a sort of bidding system where the holder of the rights is permitted to pollute a certain amount. Since firms who would have a difficult time reducing emissions would value these rights the most, they would be willing to pay the most to hold these rights. If the pollution rights were held by a firm that didn't value it as highly, they would be more likely to sell it since they would profit as a result.

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