Question

Differentiate between command-and-control and market oriented solutions to negative externalities. Provide an example of each employed in pollution control.

Answer 1

Command-and-control regulation sets specific limits for emissions of pollution and/or mandates to use specific technologies to control pollution. While such regulations have helped protect the environment, they have three deficiencies: they do not provide incentives to go beyond the limits they set; they offer limited flexibility on where and how to reduce pollution; and they often have loopholes that are politically motivated. First, there is no motivation for command-and-control legislation to improve the quality of the system beyond the standard set by a specific law. Once the rules on command and control have been met, polluters will have no opportunities to do better. Second, regulation of command and control is inflexible. For all polluters, it usually requires the same quality, and often the same equipment of pollution control. This means that regulations on command and control do not distinguish between firms that find it easy and inexpensive to meet the pollution standard or further reduce pollution, and firms that may find it difficult and expensive to meet the standard.

The three main categories of market-oriented environmental policies are pollution charges, marketable permits, and better-defined property rights. A pollution charge is a tax imposed on a company's quantity of pollution. A pollution charge provides an incentive for a profit-maximizing firm to identify ways of reducing its emissions as long as the marginal cost of reducing emissions is lower than the tax. A marketable permit program is a program requiring only a certain amount of emissions to be permitted by a city or state government issues. Such emission licenses can be sold or issued to businesses free of charge.

Market-oriented policies on the climate are an instrument package. In some cases, specific policy mechanisms can work better than in others. Of example, marketable permits work best when a few dozen or a few hundred parties are strongly interested in trading, as in the case of oil refineries that require trade leads or electrical utilities that allow trade in sulfur dioxide. Nonetheless, pollution charges would usually offer a better option in situations where millions of users who do not have a strong interest in trading emit small amounts of pollution— such as emissions from car engines or unrecycled soda cans.