Question

Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain:

(a) an emissions fee,
(b) an emissions standard, and
(c) a system of transferable emissions permits.

Answer 1

Emissions fees offer flexibility but require accurate cost reflection, emissions standards provide clear limits but lack incentives for further reductions, and transferable emissions permits work best with limited trading parties and can be less effective for widespread, small-scale pollution sources.

Step-by-step explanation:

Comparing and contrasting emissions fees, emissions standards, and a system of transferable emissions permits reveals different approaches to managing pollution externalities when abatement costs and benefits are uncertain.

Emissions fees are a form of pollution charges where firms pay a set fee per unit of pollution emitted. They provide flexibility and incentivize firms to reduce emissions; however, they require accurate pricing to reflect social costs and can lead to budgetary uncertainty for firms.

Emissions standards are a command-and-control approach that mandates a specific level of emissions. While straightforward to understand, they are often rigid and do not incentivize firms to innovate or reduce emissions beyond the set standard.

Transferable emissions permits create a market for pollution rights, offering flexibility and a cap on total emissions. These work best when the number of parties is limited and willing to trade, and are less effective when pollution sources are numerous and widespread with little incentive to trade.