Question

Consider the issue of air pollution. Use an appropriate diagram to support your written answer to the following questions.
i. If the government uses ‘command and control’ is the outcome of the policy likely be efficient?
ii. Why might a Pigouvian tax be preferred to ‘command and control’ policy?

Answer 1

i.) Command and control regulation is defined as the direct regulation of an industry or activity by legislation.

It is considered to be inefficient as cost of implementation is high and revenue generation is very low.

Under command and control, due to gap in supply and demand, two things will happen:

- This will result in black marketing and pollution quantity would not come down.

- The DWL given by yelloe triangle will result in inefficient market. Also, no revenue is earned which is different for pigouvian tax. Pigouvian tax corrects DWL and also generates revenue for government.

{NOTE: Blue line is production Quantity Limit}

ii) It is considered more efficient because, the quantity of pollution is not known. So, Command and Control do not generate market efficient equilibrium. In case of pigouvian tax, it simply increases the marginal private cost to the level of marginal benefit cost leading to reduction in quantity of air pollution. The Dead Weight Loss generated because of negative externality of air pollution gets corrected by this measure and market efficiency is achieved.

In the graph, Q1 is market eqm. but Q2 is efficient outcome. So market fails.

Introduction of pigouvian curve will shift MPC curve will shift leftward to MSC curve resulting in market efficiency being achieved.