Chapter 6Externalities In Action.pptVIP

Chapter 6: Externalities In Action Outline Addressing externalities: should we focus on prices or on quantities? Understand why the answer is that “it depends…” Two problems Some highlights from Chapter 6 Acid rain: the problems with the 1970 Clean Air Act Emissions trading Global warming: Kyoto and beyond Smoking: when is it a policy problem and when is it not? A More Realistic Externality Example: Acid Rain Sulfur dioxide (SO2) and nitrogen oxides (NOX) released into the atmosphere, form sulfuric and nitric acids. These acids may fall back to earth hundreds of miles away from their original source, known as acid rain. Majority of acid rain in North America caused by SO2, much coming from coal-fired power plants concentrated in the Ohio River Valley. Acid rain is a negative production externality. It: Makes lakes more acidic. Erodes forests. Causes damage to property ($5 billion/year). Reduces visibility. Leads to adverse health outcomes History of Acid Rain Regulation 1970 Clean Air Act set maximum standards for various substances, including SO2. It set New Source Performance Standards (NSPS) for any new power plant, forcing the plant to either reduce emissions or install scrubbers. New plants, therefore, were made more expensive relative to older plants. Companies thus kept older, dirtier plants on line longer that they otherwise would. There’s an analogy to imposing regulation on new autos. Gruber calls this a consequence of “partial policy reform.” History of Acid Rain Regulation 1990 Clean Air Act Amendments mandated a reduction of more than 50% of the level of SO2 nationwide, and included all plants. It offered an SO2 allowance system that granted plants permits to emit SO2 in limited quantities, based on their historical fuel utilization. Plants were allowed to buy, sell, or save their allowances. The allowances involved very few restrictions– trading could occur anywhere within the United States, with no approval or review, and the frequency and mec