Sometimes market activities (production, buying, and selling) have unintended positive or negative...

Question

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are emitted by and local power plant, answer the following questions:

1. What two policies could you use to reduce the total amount of emissions?

2.Why do you think they each would work?

3. What would the benefits of each action be (besideemissions reduction)?

4.What would the costs of each action be?

5. how would you decide what was the best level of emission reduction?

Robert · Accepted Answer

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are emitted by and local power plant, answer the following questions:
Marginal social cost
Marginal private cost
                            Amount of tax 
MR
        Qs 
Qp
Q
The diagram shows that Qp is the private efficient/optimal level of production, whereas social optimality requires lower level of output. 
1. What two policies could you use to reduce the total amount of emissions?
Emissions cause a negative externality that drives wedge between private marginal cost and social marginal cost. The costs of ill health and innumerable diseases caused by pollution are not included in production costs by the firm that produces pollution. The policy options seek to use this gap between private and social costs to induce lower emissions in a rational manner.  
One option is to impose a per unit tax on production of the good whose product in is causing pollution.  Such a tax was proposed by Pigou, after whom the tax is called a Pigouvian tax.  
The other option is to give pollution permits/ rights. If the producers are allowed to trade the right to pollute then the market mechanism determines the price of pollution. If the community does not tolerate pollution at all then it will allow pollution at very high prices for the pollution rights.

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are emitted by and local power plant, answer the following...

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