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(solution) In the 1970's a popular governmental policy designed to reduce the negative externalities...


In the 1970's a popular governmental policy designed to reduce the negative externalities associated with air pollution was regulation. Governmental policy eventually evolved to “cap-and-trade.” Using the economic analysis discussed in class (including graphs) describe how regulation works, explain how cap-and-trade works, and discuss whether and how cap-and-trade policies improve (from an economic perspective) upon regulation. Describe, in words (no graphs), the First Theorem of Welfare Economics. Suppose that there is a negative externality in the market for trout in Colorado. Letting Q represent pounds of trout, explain (using graphs and words) why government intervention in the market for trout may be appropriate. Suppose that all trout are found in one (big) lake and that someone purchases the lake. So, they own the lake. Might government intervention be appropriate in this case? Explain your answer. Recent debate about reducing carbon emissions has focused on the relative benefits of (a) a carbon cap-and-trade (permit) system and (b) a carbon tax (i.e., a tax on emissions of carbon). (A) Using what we have learned in class, explain the economic logic underlying (a) and that underlying (b). (B) From an economic efficiency perspective, is either policy (a) or policy (b) preferred? Of course, explain your answer.

 

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