Political Favoritism as a Source of Unfair Policy Outcomes

Comparison of Outcomes: Government Intervention vs. Coasean Bargaining

Government Regulation via Production Quotas

Government Taxation to Correct a Negative Externality (Pigouvian Tax)

Distributional Effects of Pigouvian Taxes vs. Production Quotas

Mandated Compensation for Externalities

Comparison of Distributional Outcomes: Mandated Compensation vs. Pigouvian Tax

Inefficiency of Output Reduction Policies When Cleaner Technologies Exist

Political Favoritism as a Source of Unfair Policy Outcomes

Evaluating Externality Policies using Pareto Efficiency and Fairness Criteria

Factors Determining the Efficacy of Externality Policies

Political Power as an Obstacle to Legislating Externality Costs

Informational Barriers to Government Intervention on Externalities

Regulation of Noise Pollution via Time Restrictions

Examples of Product Bans as Environmental Policy

Regulation of Harmful Substances via Limits and Bans

Analysis of Externality Intervention Policies

A large-scale farm uses a pesticide that runs off into a nearby river, harming a commercial fishing operation. A government body determines the exact monetary damage to the fishery per ton of pesticide used. It wants to implement a policy that forces the farm to reduce its pesticide use to an efficient level AND ensures the fishing operation is paid for the damages it still incurs. Which of the following policies would achieve both of these specific objectives?

Comparing Government Interventions for Pollution

A chemical factory's production process releases a pollutant into a river, which imposes costs on a downstream fishery. The market price of the chemical does not account for these downstream costs. To address this situation, a government imposes a tax on the factory for each gallon of pollutant released. What is the primary economic goal of this tax in the context of market efficiency?

When a factory's production process creates a harmful pollutant, a government policy that completely bans the factory's operation is the most economically efficient solution because it entirely eliminates the negative externality.

A government is considering two policies to address pollution from a factory that harms a nearby community. Both policies are designed to achieve the same, socially optimal level of production.

• Policy A: A per-unit tax on the factory's output, equal to the marginal external cost, with the revenue going to the government.
• Policy B: A legal requirement for the factory to pay compensation directly to the harmed community, with the payment equal to the marginal external cost.

From the factory's perspective, how do the total costs (i.e., the reduction in its profits) of these two policies compare?

Policy Evaluation for Urban Noise Pollution

A government wants to reduce industrial pollution to a specific, socially optimal level. It is considering two different policies to achieve this exact same reduction: 1) setting a quantitative limit (a quota) on the total amount of pollution allowed, or 2) imposing a per-unit tax on emissions. What is a key difference in the economic outcomes between the tax and the quota?

A city government is planning to address the negative externality of air pollution from its public bus fleet, which currently uses diesel engines. The proposed policy is to implement a per-gallon tax on diesel fuel, set equal to the estimated marginal external cost of the pollution. Shortly before the policy is enacted, a study confirms that converting the fleet to electric power would be a cost-effective alternative, eliminating most pollution and reducing long-term operating costs. Given this new information, which statement provides the most accurate economic evaluation of the proposed diesel fuel tax?

Match each government intervention strategy for correcting a negative externality with its primary mechanism or distinguishing outcome.