Inefficiency of Output Restriction When Alternative Production Methods Exist
When a negative externality is caused by a specific production technology, and cleaner alternatives are available, policies that simply restrict output are economically inefficient. This is because a Pareto improvement is possible: if producers switch to the alternative technology, they could potentially find a new profit-maximizing output level that makes them better off, while simultaneously eliminating the external cost, leaving the affected third party no worse off.
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