regulation of externalities environmental protection
Post on 04-Jan-2016
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Regulation of Externalities
Environmental Protection
Risk & The Environment -- Links• Efficient Environmental Protection
– Marginal cost of harm– Marginal cost of abatement
• Key Questions: What is the value of –– A (statistical) life saved? – A (statistical) tree saved? – A (statistical) dolphin saved?
• Key Issues– Consumer heterogeneity (Costs & Benefits)
• Income, Geography, Workers– Distribution of costs & benefits
• Upstream/downstream– “Real” market solutions vs. “Real” regulatory solutions
Regulatory Approaches• Prescriptive Limits (Command & Control)
– Best Available Technology• Cheap enforcement, inflexible, static
– Effluent Limits (PPM)• Somewhat expensive enforcement, somewhat flexible
– Effluent Limits (Total)• Expensive enforcement, most flexible (& tradable), dynamic
• Incentive Systems (Market Mechanisms)– Internalize marginal cost– Firms choose least costly means of abatement– Costs reflected in prices
Tradable Permits• Examples
– Existing: Sulfur Dioxide (Acid Rain)– Proposed: Greenhouse Gas (Global Warming)
• System– Allocate emission rights (grants, auctions)– Firms & interest groups make buy/sell decisions– Consumer prices reflect emission prices (shift in supply curve)
• Example– Market price is t per unit of product for a particular firm– Firm can buy permit or install filters at cost of c with increasing
marginal cost (10% cut costs c, 20% costs 4c, 30% costs 9c)– Choice: Reduce emissions until MC=t, then purchase permit
• Permits vs. Taxes– Known abatement levels, preference heterogeneity, dynamic
efficiency
Firm Abatement Decisions
% Abatement
Cost Firm A MC Firm B MC
Firm AEfficientAbatement
Firm BEfficientAbatement
Global WarmingThe Ultimate Externality
• EDF System– Tradable permits for greenhouse gasses– Goal – reduce emissions to 1990 levels– International trades permitted– Trading system reduces cost from $582 to $19.9
billion
• Issue– Initial allocation– Short-term incentives– Compensated damages & moral hazard– Monitoring
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