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Regulation Can regulate by making behaviors required or forbidden Ex: crime to dump poisonous chemicals into the water supply Ex: can dictate Max level of pollution that factory may emit Market-Based Policy 1 : Corrective Taxes and Subsidies Can use market-based policies to align private incentives with social efficiency Covet an internalize externalities by taxing activities that have negative externalities & subsidizing activities that have positive externalities Corrective taxes (aka Poisoning taxes): taxes enacted to deal with the effects of negative externalities Ideal corrective tax would equal external cost from an activity with negative externalities Idea corrective subsidy would equal external benefit from an activity with positive externalities Corrective taxes alter incentives to account for the presence of externalities and move allocation of resources closer to the social optimum While restrictive taxes raise revenue for the gobo, they also enhance economic efficiency Market-Based Policy 2: Treatable Pollution Permits Objections to the Economic Analysis of Pollution Rich countries can afford cleaner environment than poor ones, and therefore usually have more rigorous environmental protection Clean air and clean water obey law of demand: lower price environmental protection, the more the public will want Economic approach of using pollution permits and corrective taxes reduces cost of environmental protection and should, therefore, increase clean environment Private Solutions to Externalities
Types of Private Solutions Solved with moral codes and social sanctions Don’t litter because Just not right Charities PU lick b ‘s demand tort a Sierra Club: goal to protect environment, nonprofit organization funded with private donations Rely on self-interest of relevant parties Solution takes form of integrating different types of businesses Interested parties to enter into contract The Cease Theorem Cease theorem: proposition that private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own Private market will reach the efficient outcome on its own Overall: says private economic actors can potentially solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient Why Private Solutions Do Not Always Work Transaction costs: the costs that parties incur in the process of agreeing to and following through on a bargain When private bargaining does not work, the covet can sometimes play a role Covet designed for collective action