Comparing Pollution Control Policies

The Defining Institution of Modern Economies

A factory's production process creates a negative externality, causing $50,000 in damages annually to a local fishery. A regulator is considering two policies to correct this market failure, both of which are expected to result in the same $50,000 reduction in the factory's profits. Policy 1 is a tax levied on the factory equal to the damages. Policy 2 is a rule requiring the factory to pay the fishery for any damages caused. Which statement best analyzes the financial consequences for each party under these two policies?

Comparing Externality Correction Policies

Comparing Externality Correction Policies

A government policy that requires a polluting firm to directly pay for the damages it causes to affected parties will always result in a smaller reduction in the firm's profits compared to a government tax of the same total amount levied on the firm's polluting activity.

Match each policy or outcome related to correcting a negative externality with its most accurate description.

Policy Evaluation: Distributional Effects of Environmental Regulation

A chemical factory's operations result in a negative externality for a nearby community. A regulator is considering two policies to address this, both designed to make the factory internalize the full social cost of its actions. Policy A is a tax on the factory equal to the value of the external harm. Policy B requires the factory to directly pay the affected community an amount equal to the value of the external harm. Assuming both policies lead to the same reduction in the factory's output and profits, which statement best analyzes the distributional consequences of these two approaches?

Policy Choice for Externality Correction

A factory's production process creates a negative externality, causing $50,000 in damages annually to a local fishery. A regulator is considering two policies to correct this market failure, both of which are expected to result in the same $50,000 reduction in the factory's profits. Policy 1 is a tax levied on the factory equal to the damages. Policy 2 is a rule requiring the factory to pay the fishery for any damages caused. Which statement best analyzes the financial consequences for each party under these two policies?