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Microeconomics
Externalities
| Question | Answer |
|---|---|
| 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. |
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