Note 6 - Command and control + Market-based instruments

Command and control instruments

Government intervention to do this/not do this. Government commands you.

4 Types of Command and Control Instruments

1) Input restrictions

2) technology requirements

3) Location control

4) non-transferable emissions permits

Input restrictions

Control the inputs used. Ban certain inputs/require environmentally friendly ones

Technology Requirements

Require to use best available pratices, etc.

Zoning

if pollutant non-uniformly mixing, location matters. Isolate locations by zoning from potential victims/public to reduce human exposure.

Non-transferable emissions permits

give firms permits to emit a maximum certain quantity. not least cost as EPA does not know firm abatement costs. Used to fix max emissions = # of permits.

5 types of market-based instruments

1) Pigovian tax

2) Pigovian subsidy

3) emissions tax

4) emissions subsidy

5) Cap and trade permits

Pigovian tax

Set tax per unit of good = MD at socially optimum quantity. increases PMC. However, must know exact MD.

Pigovian subsidy

Give subsidy per unit not produced → incentive to produce less. Subsidy = MD at socially optimum Q. So long as subsidy > MB-MC, firm will reduce Q until q* and take subsidy

Why are pigovian subsidies unpopular?

Not popular because they increase profits of polluters, subsidy must come from taxes imposed elsewhere, paying a firm not to pollute is not popular.

Emissions tax

tax on each emission equal to shadow price of emissions.

reduce MB of emissions/MC of abatement until. if u abate: dont pay tax.

if abatement cost unknown, apply arbitrary tax rates, measure impact on emissions, and adjust tax accordingly.

Emissions subsidy

Subsidy reduces MC of abatement by s = shadow price of emissions = emssions tax.

How are emissions taxes and subsidy different?

Differ only in distribution of ganes/losses.

Cap and trade permits

• Polluters need a permit to emit

• permits bought and sold on market

• polluter willing to pay for permit so long as P_permit <MC abatemnet

• initial distribution of permits has no impact on final distribution, but impacts distribution of permits. those with more permits intially get richer by selling permits.