ECO2030 1nd Edition Lecture 25 Outline of Last Lecture I Pollution permits and corrective tax Outline of Current Lecture II Pollution permits and corrective tax III Coase Theorem Current Lecture Reducing pollution with pollution permits or corrective taxes Both force firms to internalize the externality pay for their pollution Corrective taxes provide revenue for the government Pollution permits create a market for permits are given or buy permits to pollute The following two graphs will be on the Exam A corrective tax sets the price of of pollution This determines the quantity because we can look at the demand curve and determine the quantity Most economists say that carbon taxes are better than Pollution trading because we do not know what amount of pollution is Ideal They say that it is better because it requires every firm to think of ways to reduce emissions Price of Polluti on Corrective Tax P Q Demand for pollution rights of Quantity pollution These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Pollution permits set the quantity of pollution This also determines the price of pollution because it can be found from the demand curve Price of Polluti on supply of pollution permits P Objections to the economic analysis of pollution we cannot give anyone the Demand option to pollute for a fee for Edmund Muskie pollutionof Quantity Q People face trade offs rights Pollution eradicating all pollution is possible clean water and clean air have an opportunity cost Trade off lower standard of living price of goods go up if pollution is reduced Clean environment is like a normal good Positive income elasticity Rich countries can afford a cleaner environment they can afford to tax pollution Therefore rich countries have more protection Clean air and clean water law of demand The lower the price of environmental protection the more people want it Other types of private solutions coase theorem moral codes and social sanctions Two parties can negotiate an outcome and they will reach an efficient outcome As long as the transaction costs are low Property rights determine outcome The Coase Theorem a private solution to externalities Works if parties can negotiate without high transaction costs e g need for a lawyer If they do not have high transaction costs they will solve the problem on their own Then everyone is better off and the outcome will be efficient Private solutions do not always work when transactions costs are too high time or money when parties do not follow through with agreements when there are too many parties involved All these reasons lead to high transaction costs increases time effort or money
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