Theory of Regulation

question 38

Essay

Theory of Regulation. The Badger Power & Light Company generates electricity, and in the process emits sulfur dioxide into the local atmosphere. As a concerned citizen, you are appalled at the aesthetic and environmental implications of the company's policies, as well as the potential health hazard to the local population.
A. Pollution is a negative production externality and an example of market failure. What might you cite as reasons why markets fail?
B. In analyzing remedies to the current situation, consider two general types of controls to limit pollution:

Regulations--licenses, permits, compulsory standards, and so on.
Charges--excise taxes on polluting fuels (coal, oil, and so forth), pollution discharge taxes, and others.

Review each of these methods of pollution control.
1. Determine the incentive structure for the polluter under each form of control.
2. Decide who pays for a clean environment under each form of control. (Note that each form of control has definite implications about who owns the property rights to the environment.)
3. Defend a particular form of control on the basis of your analysis, including both efficiency and equity considerations.

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Definitions:

Stacked Object

A graphical representation of objects positioned one on top of another, often used in data visualization to compare different values.

Stack

A data structure that follows the Last In, First Out (LIFO) principle, where the most recently added item is the first one to be removed.

Color Saturation

The intensity of a color, expressed as the degree to which it differs from white.

Intensity

The strength, brightness, or concentration of a color, sound, or other phenomenon.