17.2 Pollution-Reduction Policies LO 2,
3
Direct regulatory controls are often inefficient because they require
that all polluters meet the same standard regardless of the benefits
and costs of doing so.
Efficient pollution abatement requires that the marginal cost of
abatement is equated across firms. This can be achieved with market-
based policies, such as emissions taxes or cap-and-trade systems.
Emissions taxes work by requiring polluters to pay a tax per unit of
pollution produced. The tax becomes the marginal benefit of
pollution abatement to the firms. Since all firms face the same tax per
unit of pollution, their profit-maximizing behaviour will bring about
efficiency in pollution abatement.
Cap-and-trade systems work by the government establishing an
upper limit on emissions, issuing permits to firms, and then allowing
those permits to be freely traded. The market price of the permit then
represents firms’ marginal benefit of pollution abatement. Efficiency
in pollution abatement is achieved because firms’ profit-maximizing
behaviour leads their marginal abatement costs to be equated.