Political Power as an Obstacle to Legislating Externality Costs
A primary reason that legal frameworks often fail to make decision-makers pay for all the costs they inflict on others is the political influence of the responsible parties. Entities that profit from activities causing harm, such as large multinational companies, may be powerful enough to prevent the enactment of legislation that would address the externality.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
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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
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- 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?
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If a government accurately calculates the marginal external cost of pollution from a factory and imposes a tax of exactly that amount on each unit of output, the market failure will be fully and efficiently resolved, regardless of the factory's political influence or the public's perception of the tax.
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Learn After
A country's legislature is considering a new law that would impose a significant tax on carbon emissions from industrial manufacturing to address air pollution and health problems in nearby communities. The largest manufacturing corporations in the country, which are major employers and campaign contributors, have launched an extensive public relations and lobbying campaign against the proposed tax. Despite widespread public support for the measure, it fails to pass. Which of the following statements best analyzes this outcome from an economic perspective?
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