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Chapter 5: Problem 3

Why do most economists prefer tradable emission allowances to the command-and- control approach to pollution?

Short Answer

Expert verified
Economists usually prefer tradable emission allowances over the command-and-control approach because these allowances are more flexible and cost-effective. They allow companies to decide how to meet their emission targets and form a market incentive for reduction, which tends to stimulate environmental innovation and efficient resource allocation.

Step by step solution

01

Understanding the Command-and-Control approach

The command-and-control (CAC) approach to environmental policy involves the government directly regulating pollutants, by setting the maximum permissible level of pollution and enforcing fines or penalties for violations. This process requires extensive monitoring and enforcement mechanisms on the part of the government.
02

Understanding Tradable Emission Allowances

On the other hand, tradable emission allowances, also known as cap-and-trade systems, involve the government setting a maximum allowable level of pollution and dividing this into permits which can be bought and sold by companies. In this strategy, companies that can reduce their pollution levels more efficiently have an incentive to do so, as they can sell their remaining allowances to companies for whom reduction is more costly.
03

Comparing the Two Approaches

The comparison of the two strategies shows that tradable pollution permits create a market incentive for companies to reduce their pollution, potentially driving innovation and efficiency in pollution reduction. Additionally, they give companies flexibility in how they meet their emission targets, unlike the CAC approach. The tradable permit system also minimizes the total cost of achieving a given amount of pollution reduction, which makes it a cost-effective solution.
04

Why Economists Prefer Tradable Emission Allowances

Economists generally prefer market-based solutions like tradable permits because they align with the principles of free market economics, lead to efficient allocation of resources, stimulate environmental innovation, and are generally more cost-effective.

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Most popular questions from this chapter

What is the Coase theorem? Why do the parties involved in an externality have an incentive to reach an efficient solution?

Discuss the factors that determine the marginal cost of reducing crime. Discuss the factors that determine the marginal benefit of reducing crime. Would it be economically efficient to reduce the amount of crime to zero? Briefly explain.

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(Related to the Apply the Concept on page 163 ) An economics student made the following comment about a proposed carbon tax: I read that a tax on carbon would have a greater negative effect on low-income consumers than high-income consumers, but I disagree. Business executives spend a lot of money and time traveling- both by car and plane. Many rich people have homes that are considerably larger than the average family's home. Heating and air conditioning bills are certainly greater for larger homes than smaller homes. The cost of a carbon tax would surely be greater for those with the highest incomes. Explain whether you agree that a carbon tax would impose a greater burden on high-income consumers than low-income consumers.

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