Question

A certain agricultural firm has the immense demand function p=30-q and marginal cost of MC=Q. suppose the government introduces a tax =3.5Q

The efficient level of production

The equilibrium after tax

The tax burden

The excess tax burden

Where individuals are left to act on the their own, efficient solution to externalities may not be attained. Explain six ways in which the problem of externalities can be addressed

Answer 1

Economic activity causes pollution. Pollution is a spillover cost of production that causes inequality and distorts the allocation of resources. Government therefore regulates private business by the standard approach and incentive based environmental policies. With the standard approach, a maximum acceptable level of pollutant is established and firms that exceed this level are punished by the means of fine. On the other hand, the incentive-based regulation schemes are pollution fees and pollution permits that utilize efficiencies of the marketplace.

Two classification of standard approach is: (a) Performance standard, (b) Design standard.

1. A performance standard specifies a certain level of performance that must be met.
2. A design standard specifies the required level of performance as well as the means to reach that level.

Two incentive based regulation scheme for regulation of pollution are: (a) Pollution fees; and (b) Marketable Pollution Permits.

1. Pollution fees: The pollution fees reduces the spillover cost of pollution by giving the firm an incentive to change their behavior, either by forcing them to pay a fee or by finding a new less harmful process of production. The pollution fees can either be an effluent fee that is taxes on production that causes water pollution; or emission fee that is taxes on production that causes air pollution.
2. Marketable Pollution permits: Under marketable pollution permits approach, the maximum level of pollution that is acceptable to the society is divided in to units. Government then issue permits that allow the business firms to produce these units.