Question

What is more efficient: a market incentive program or a regulatory program? Explain why.

Answer 1

Solution:

The two options available are market incentive program and regulatory program.I would prefer the market incentive program over the regulatory program.This is because in a regulatory program,the regulator (in most cases,it would be a department of the government (or) an appointed by the government) makes the regulations like providing the guidelines and ensuring that they are followed by the different players in the market.

But in market incentive program,the government just incentivises the ones who are just implementing / or ahead in following the guidelines set by the regulator.So,their model /structure of monitoring is different.

The market functions more efficiently if a ,market incentive program is followed.Following a regulatory program may lead to inefficiences in most of the cases.

Example:In the case of regulating the emissions of Co2 ,you can observe that the methodology of ETC (emission transfer certficates) yields to higher efficiences when compared to traditional implentation of equal fixed emission limits on all the firms.So,here the companies which are able to reduce their emission levels below the limit fixed by the government or regulatory body(say achievers),are incentivized.In the same manner the firms which are not able to achieve the limits are given a chance for improvement as they buy the certficates from the achievers.It is efficient also as not all the firms have the same cost for reducing the emission and also not all firms have the same benefit /unit out of not reducing the emission limits .So,the industry adjust within itself for the total maximum permisssible emission limit which is put up.

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