Question

1

a) Show that when all consumers and producers are price takers, a competitive equilibrium is always Pareto optimal. (9 marks)

b) Despite economists’ support of a market approach to environmental policy, the command- and-control approach continues to dominate the policy of most nations. Explain why this is the case. In your response, cite and then comment on some of the common criticisms of market-based initiatives. ( 6 mark )

c) Explain the following using appropriate diagram. ( 20 mark )

i. Pigouvian Tax

ii. Pigouvian Subsidies

iii. Deposit/refund systems

iv. Pollution permit trading systems

Answer 1

a The basic idea in the analysis of competitive equilibrium is the "law of supply and demand. Utility maximization by individual consumers determines individual demand. Summing over individual consumers determines aggregate demand, and the aggregate demand curve slopes downward. Profit maximization by individual firms determines individual supply, and summing over firms determines aggregate supply, which slopes upward.

b)

Command-and-control regulation has been highly successful in protecting and cleaning up the US environment. In 1970, the Environmental Protection Agency was created to oversee all environmental laws In the same year, the Clean Air Act was enacted to address air pollution. Just two years later, in 1972, Congress passed and the president signed the far-reaching Clean Water Act. These command-and-control environmental laws, and their amendments and updates, have been largely responsible for cleaner air and water in the United States in recent decades. However, economists have pointed out three difficulties with command-and-control environmental regulation. First, command-and-control regulation offers no incentive to improve the quality of the environment beyond the standard set by a particular law.Once the command-and-control regulation has been satisfied. polluters have zero incentive to do better Second, command-and-control regulation is inflexible. It usually requires the same standard for all polluters, and often the same pollution-control technology as well. This means that command-and-control regulation draws no distinctions between firms that would find it easy and inexpensive to meet the pollution standard--or to reduce pollution even further-and firms that might find it difficult and costly to meet the standard. Firms have no reason to retihink their production methods in fundamental ways that might reduce pollution even more and at lower cost

. Pigouvian Tax

A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that generates negative externalities (costs not included in the market price) te age prte co praragal The tax is intended to correct an undesirable or tas inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. ouarbts

i. Pigouvian Subsidies|

A Pigouvian Subsidy A Pigovian subsidy or Pigouvian subsidy is a subsidy provided to an activity on the grounds (i.e., with the explicit rationale) that the activity generates external benefits (i.e., positive externalities). .. However, unlike Pigouvian taxes, Pigouvian subsidies could in principle be provided through wmcne suPL Par ooes www.atlas101.ca private philanthropy. Jan 13, 2014

i. Deposit/refund systems

Hewde A deposit-refund system (DRS), also known as deposit-return system, advance deposit fee or deposit-return scheme, is a surcharge on a product when purchased and a rebate when it is returned. A well-known example is when container deposit legislation mandates that a refund is given when reusable packaging is returned.

iv. Pollution permit trading systems

Tradable pollution permits are so-called cap and trade schemes. They give companies a legal right to pollute a certain amount per fixed time span. Firms that pollute less can then sell their leftover pollution permits to firms that pollute Credits are traded within defined trading areas. Mar 3, 2017 more. ...