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What are ther two ways the government can handle externalities? Command-and-control policies and Market-based policies
What is command-and-control policy? Government regulation
What are examples of command-and-control policy? -Limit on how many a factory can pollute. -Require that each factory should get a particular technology
What does market-based policy do? Gives incentives to private decision-makers, so they can decide to solve the problemsm by themselves.
What are examples of market-based policy? -Corrective tax and subsidy -Tradable pollution permits
What tax makes private decision-makers to become aware of the price of negative externality? Corrective tax
What does an ideal corrective tax equals? External cost (negative externality)
What does an ideal corrective subsidy equals? External benefits (positive externality)
Why is gas tax a corrective tax? It reduces traffic on the road, accidents, and pollution.
True or false: The firm that has the highest reduction cost reduces pollution the most. False; the firm is likely to pay the tax. others with LOW reduction cost reduce the most.
Which one helps reduce pollution? Regulation or corrective tax Corrective tax is effective because it gives firms the incentive to reduce pollution at a lowest cost and to buy efficient technology. on the other hand, firms won't reduce above the specified level.
Created by: U0105006



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