Question

1.     The production of Michael’s Secret Stuff Sports Drink also has a negative externality. The disposal of the excess beverage pollutes water ways. Consider three policy options to correct this market: corrective tax, tradable pollution permits, regulation limiting production.

a.      Discuss the differences between these policies. Decide which the best solution is and explain why

Answer 1

A corrective tax is a market based policy used by government to addressed negative externalities. In this policy taxes increases the cost of producing goods and services generating the externality , thus encourage the firms to produce less output. In this tax based policy , a tax is set for pollution beyond a certain level. when the mginal cost and marginal benefit of pollution control are known certainty, the amount of tax can be set to the efficient marginal cost of pollution and firm will choose to clean up an amount of pollution that is exactly efficient.

Tradable pollution permits provide an incentive to polluters to internalise the externality. Tradable permits to pollute involve : the government or an appointed agency , selling the right to generate a given quantity of pollution to firms in an industry. by deciding on proper level of atmospheric pollution desired, we create a market mechanism so that the "invissible hand" efficiently allocates the right to pollute among firms. This mechanism allows for firms to trade the right to pollute through emission trading. Firms that reduce their emerssion by selling numbers of permits to other firms. or save them to cover emission in the future. The market based allowance trading system capitalizes on the power of the market place to reduce pollution cost effectively and uses economic incentives to promote conservation.

regulation limiting production

regulation to control environment pollution can be divided in to two parts

• performance standard. these are regulations based on measuring the obsevable out come of the polluter's behaviour, such as limits on the chemical resiues in water effluent from a factory or power station
• design standard. in this , the farmer produce food and manage their lands.farmer use pesticides for their crops. their are loss by pesticides. Regulatory approache can lead to higher total cost of pollution abatement.

the best policy to controll the negative externality is corrective tax abatement .