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APPALACHIAN ECO 2030 - Internalizing negative externalities
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Price of PollutionCorrective TaxQuantity of pollutionDemand for pollution rightsQP ECO2030 1nd Edition Lecture 25Outline of Last Lecture I. Pollution permits and corrective taxOutline of Current Lecture II. Pollution permits and corrective taxIII. Coase TheoremCurrent LectureReducing 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 polluteThe following two graphs will be on the Exam*● A corrective tax sets the price ofof pollution● This determines the quantitybecause we can look at thedemand curve and determine thequantity○ Most economists say thatcarbon taxes are betterthan Pollution tradingbecause we do not knowwhat amount of pollution isIdeal. ○ They say that it is betterbecause it requires everyfirm to think of ways toreduce emissions. 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.Price of PollutionDemand for pollution rightssupply of pollution permitsQuantity of PollutionPQ● Pollution permits set the quantityof pollution● This also determines the price ofpollution because it can be foundfrom the demand curve● Objections to the economicanalysis of pollution○ “we cannot give anyone theoption to pollute for a fee.”Edmund Muskie● People face trade-offs○ eradicating all pollution ispossible ○ 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


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APPALACHIAN ECO 2030 - Internalizing negative externalities

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