Question

Classify the following pollution-control policies as command-and-control or market incentive based. a. A state emissions tax on the quantity of carbon emitted by each firm. b. The federal government requires domestic auto companies to improve car emissions by \(2020 .\) c. The EPA sets national standards for water quality. d. A city sells permits to firms that allow them to emit a specified quantity of pollution. e. The federal government pays fishermen to preserve salmon.

Short answer

a. Market incentive-based policy b. Command-and-control policy c. Command-and-control policy d. Market incentive-based policy e. Market incentive-based policy

Step-by-step solution

(Classify Policy a)

The state emissions tax on the quantity of carbon emitted by each firm can be considered as a market incentive-based policy. This is because the tax creates a financial incentive for the firms to reduce carbon emissions without directly limiting the amount they can emit.

(Classify Policy b)

The federal government requiring domestic auto companies to improve car emissions by 2020 is a command-and-control policy. This is because it imposes a specific requirement, i.e., improving emissions, on auto companies and is a direct regulation.

(Classify Policy c)

The EPA setting national standards for water quality is a command-and-control policy. This policy directly sets standards for water quality, and businesses or individuals would need to meet those standards to comply with the regulation.

(Classify Policy d)

A city selling permits to firms, allowing them to emit a specified quantity of pollution, can be considered a market incentive-based policy. This is because the permits can be traded in the market, and firms that can reduce pollution at a lower cost will do so. This would create a financial incentive for firms to reduce pollution but would let the market decide the most efficient way to achieve this.

(Classify Policy e)

The federal government paying fishermen to preserve salmon is a market incentive-based policy. This policy provides a financial incentive to fishermen to contribute towards salmon preservation by compensating them for their efforts, without imposing strict regulations on their fishing activities.

Key concepts

Market Incentive-Based Policy

Understanding how market incentive-based policies work is crucial for grasping how economics can be leveraged to address environmental issues. These policies, often referred to as 'market-based instruments', are designed to provide economic incentives for individuals and firms to curtail their environmentally harmful behaviors.

For example, consider a state emissions tax, which is imposed on companies based on the amount of carbon they emit. Such a tax encourages firms to innovate and reduce their emissions, as doing so will lower their tax burden. As a result, they have a financial gain for being more environmentally friendly. The intricacy of these policies is that they use the market's own mechanisms, such as profit motives and competitive advantages, to drive environmentally positive outcomes.

In the case of selling pollution permits, firms that are able to reduce pollution at lower costs will do so and sell their permits to other firms, thereby making a profit and also incentivizing others to find cost-effective pollution control methods. This creates a dynamic where the entire market is engaged in reducing pollution.

Command-and-Control Policy

In contrast to market incentive-based policies, command-and-control policies are direct regulations that impose specific standards or requirements on individuals or businesses. These regulations stipulate what must be done to reduce pollution and often come with penalties for non-compliance.

For instance, when the federal government mandates that auto companies must improve car emissions by a certain date, it is employing a command-and-control approach. This does not allow for flexibility on behalf of the companies; instead, it sets a rigid standard that must be met. Similarly, when the EPA establishes nation-wide water quality standards, these rules must be adhered to without consideration for the cost or method each entity will use to achieve compliance.

These policies are straightforward in their intention and compliance requirements, making them simple to understand but often criticized for being inflexible and potentially economically inefficient.

Environmental Regulation Economics

The economics behind environmental regulation encompasses the study of how these policies, whether market incentive-based or command-and-control, affect the economy and the environment. Economics helps us understand the cost-benefit analysis of environmental policies, and to devise the most efficient ways to reduce pollution and preserve natural resources.

When the government pays fishermen to preserve salmon, for instance, it is using an economic understanding of incentives to achieve a conservation goal. Conversely, the cost of meeting direct regulations, such as car emissions standards, can lead to increased costs for companies, which might be passed on to consumers.

Economics provides the tools to evaluate how different regulatory approaches can lead to different outcomes in terms of environmental quality, economic growth, and the distribution of costs and benefits among various stakeholders in society. It aids policymakers in balancing environmental goals with economic considerations to create effective and sustainable regulations.