Chapter 7 Outline
A. Pollution Tax
1. Use of a Pigovian or excise tax on emissions can reduce the costs of achieving environmental quality.
2. A Pigovian tax regulates pollution by setting a price that polluters must pay per unit of emission.
a. This forces polluters to bear the external cost associated with their actions.
b. Since costs are increased, polluters undertake less of the activity.
3. A Pigovian tax is superior to regulation.
a. Authorities do not have to specify who will be required to reduce pollution or specify how much pollution must be reduced.
b. The cost of reducing pollution is minimized.
1. Polluters who can control pollutants more cheaply than paying the tax will decrease emissions.
2. Polluters who cannot control pollutants more cheaply than paying the tax will emit pollutants and pay the tax.
c. The tax induces firms to find new, low cost ways to reduce pollution.
4. A Pigovian tax will probably be borne by all parties (consumers and resource owners) who benefit directly from the production of a good or service.
B. Markets in Pollution Permits
1. Pollution permits allow polluters to emit a certain amount of pollutants.
2. Polluters who can control pollutants more cheaply can reduce emissions below the standard, and then sell their excess permits to polluters who find it more expensive to control pollutants, resulting in lower overall costs of pollution control.
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