Question

4. Understanding different policy options to correct for negative externalities Carbon dioxide emissions have been linked to worsening climate conditions. The following table lists some possible public policies aimed at reducing the amount of carbon dioxide in the air. For each policy listed, identify whether it is a command-and-control policy (regulation), tradable permit system, corrective subsidy, or corrective tax. Command- and- Control Policy Tradable Permit Corrective Corrective Public Policy Subsidy System Tax The government orders every factory to adopt a new technology, which reduces carbon- dioxide emissions into the atmosphere. The government charges factories $170 for every ton of carbon dioxide they emit. The government limits total carbon-dioxide emissions by all factories to 140,000 tons per year. Each individual factory is given the right to emit 120 tons of carbon dioxide, and factories may buy and sell these rights in a marketplace. Trees take carbon dioxide out of the air and convert it to oxygen, so the government funds a tree-planting initiative by offering $170 to any citizen who plants a tree.

Answer 1

In policy 1 government relies on regulation rather than any financial incentives. Therefore this policy is command and control policy.

In policy 2 government is discouraging further emission of CO2 by imposing tax on emission of CO2. This will discourage to producers to produce more quantity of product as now their product's cost of production has increased. Therefore, this is corrective tax policy.

In policy 3 government has set a limit for the total emission of CO2. Companies may buy or sell permits to each other. Any company emitting CO2 more than the permit it has, can face legal actions. Therefore due to this policy government has set a upper bound for the emission of CO2. This is tradeable permit system.

In policy 4 government is giving encouraging to reduce CO2 level by giving subsidy to plant trees. This is corrective subsidy policy.