Theory of Regulation. The New England Power & Light Company generates electricity, and in the process emits sulfur dioxide into the local atmosphere. As a concerned citizen, you are appalled at the aesthetic and environmental implications of the company's policies, as well as the potential health hazard to the local population.
A. Pollution is a negative production externality and an example of market failure. What might you cite as reasons why markets fail?
B. In analyzing remedies to the current situation, consider two general types of controls to limit pollution:

Regulations--licenses, permits, compulsory standards, and so on.
Payments--various types of government aid to help companies install pollution-control equipment. Aid can take the form of forgiven local property taxes, income tax credits, special accelerated depreciation allowances for pollution-control equipment, low-cost government loans, and so on.

Review each of these methods of pollution control and:
1. Determine the incentive structure for the polluter under each form of control.
2. Decide who pays for a clean environment under each form of control. (Note that each form of control has definite implications about who owns the property rights to the environment.)
3. Defend a particular form of control on the basis of your analysis, including both efficiency and equity considerations.

Question

Theory of Regulation. The New England Power & Light Company generates electricity, and in the process emits sulfur dioxide into the local atmosphere. As a concerned citizen, you are appalled at the aesthetic and environmental implications of the company's policies, as well as the potential health hazard to the local population.
A. Pollution is a negative production externality and an example of market failure. What might you cite as reasons why markets fail?
B. In analyzing remedies to the current situation, consider two general types of controls to limit pollution:
 
 Regulations--licenses, permits, compulsory standards, and so on.
 Payments--various types of government aid to help companies install pollution-control equipment. Aid can take the form of forgiven local property taxes, income tax credits, special accelerated depreciation allowances for pollution-control equipment, low-cost government loans, and so on.
 
Review each of these methods of pollution control and:
1. Determine the incentive structure for the polluter under each form of control.
2. Decide who pays for a clean environment under each form of control. (Note that each form of control has definite implications about who owns the property rights to the environment.)
3. Defend a particular form of control on the basis of your analysis, including both efficiency and equity considerations.

Quizplus · Accepted Answer

The Answer of Theory of Regulation. The New England Power & Light Company generates electricity, and in the process emits sulfur dioxide into the local atmosphere. As a concerned citizen, you are appalled at the aesthetic and environmental implications of the company's policies, as well as the potential health hazard to the local population.
A. Pollution is a negative production externality and an example of market failure. What might you cite as reasons why markets fail?
B. In analyzing remedies to the current situation, consider two general types of controls to limit pollution:
 
 Regulations--licenses, permits, compulsory standards, and so on.
 Payments--various types of government aid to help companies install pollution-control equipment. Aid can take the form of forgiven local property taxes, income tax credits, special accelerated depreciation allowances for pollution-control equipment, low-cost government loans, and so on.
 
Review each of these methods of pollution control and:
1. Determine the incentive structure for the polluter under each form of control.
2. Decide who pays for a clean environment under each form of control. (Note that each form of control has definite implications about who owns the property rights to the environment.)
3. Defend a particular form of control on the basis of your analysis, including both efficiency and equity considerations.