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Correcting Negative <- Consumption and Productive -> Externalities -…
Correcting Negative
<- Consumption and Productive ->
Externalities
Policies
Market-based Policies
Pigouvian Taxes/Carbon Taxes
Advantages
Has the potential to eliminate or reduce the negative production externality
Acts as an incentive to firms to switch production methods
Reduces the output supplied towards the optimal quantity supplies
Internalizes the externality: Makes the EC a part of the MPC so that firms recognize it
Disadvantages
Estimating the EC is difficult and it can possibly be inaccurate
Determining a tax value is difficult
Taxing the good may not reduce the externality, just the supply
Tradable Permits
Advantages
Incentivizes the firm to reduce the negative production externality
Consumers may benefit
Incentive to change production method
Disadvantages
Does not stop pollution
Consumers may be charged higher prices
Interventionist Policies
Government Regulations
Advantages
Can completely eliminate externality
Reduces the size of the externality
Reduces the quantity supplied towards optimal quantity
Disadvantages
Estimating the EC is difficult and it can possible be inaccurate
Governments must monitor enforcement which is
costly and time-consuming
Disputes between the government and firms will lead to additional legal fees
Collective Self-governance
Study shows that people do not always act selfishly
Requires proper communication
Education and raising awareness
International Agreements
Government Regulation
Advantages
Can totally eliminate externality (through bans)
Reduces the size of the externality
Reduces the quantity demanded towards the optimal quantity
Quick to implement
Disadvantages
Assessing value of the external cost is challenging
Bans may create a parallel market
Advertising/Persuasion
Advantages
Easy to implement
Reduces the externality
Reduces the quantity demanded towards the optimal quantity
Disadvantages
Needs funding
No guarantee of effectiveness
Taxes
Advantages
Raises revenue for the government
Reduces the size of the externality
Reduces the quantity demanded towards the optimal
Disadvantages
Value of the external cannot be assessed easily
Taxes may be ineffective for inelastic goods (most de-merit goods)
Politically unpopular