"The federal government pays fishermen to preserve salmon." why does this act classified as market-incentive approach? it doesn't belong to any of the three tools. in other words, what is the definition of market-incentive?

The government is offering an incentive to fishermen to preserve salmon, so it is using a market approach to try to obtain a desired result. Rather than passing a law that compels the fishermen to do a certain thing, it is offering a financial incentive for the fisherman to do a certain thing - in this case preserve salmon.

in the last question, im confused why an emissions tax would be better at instigating technological changes than a law prohibiting certain emissions. is it because a tax system would give the company more time to develop solutions rather than just shut them down?

In most cases simply prohibiting the emission is not practical because our technology is not so advanced. The firms would shut down as you mentioned if no emission is allowed. This brings social benefit lost. So the government's target is to limit the quantity of emission. An emissions tax gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions—as long as the marginal cost of reducing the emissions is less than the tax. Considering the emission control law, the firms have no incentive to reduce the emission any further when they meet the law requirement.

I want to ask what's the difference between marketable permit program and property rights.

Hi, Han ZengXiang! Marketable permits are a certain amount of 'tickets' exchangeable for pollution given to firms. That is, a permit allows for a certain amount of pollution. They can then be traded among firms for money. Since firms maximize profits, they will choose the cheaper option (buy more permits or invest in greener technology), and the markets will lead permit prices to be equal to the price of investing in new technology. Property right reforms basically arrange who has to pay for externalities. Hopefully I've explained to you well enough the difference between property right reforms and marketable permit programs.

Main content

Course: Microeconomics > Unit 9

Lesson 2: Bonus articles: Pollution as a negative externality

What are market-oriented environmental tools?

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Some forms of regulation let the market work out the details.

Key points

The three main categories of market-oriented environmental policies are pollution charges, marketable permits, and better-defined property rights.
The advantage of market-oriented environmental tools is that, because of their incentives and flexibility, they can achieve any desired reduction in pollution at a lower cost to society than command-and-control regulation.

Market-oriented environmental tools

Market-oriented environmental policies create incentives to allow firms some flexibility in reducing pollution. The three main categories of market-oriented approaches to pollution control are pollution charges, marketable permits, and better-defined property rights.

A pollution charge is a tax imposed on the quantity of pollution that a firm emits. A pollution charge gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions—as long as the marginal cost of reducing the emissions is less than the tax.

A marketable permit program is a program in which a city or state government issues permits allowing only a certain quantity of pollution. These permits to pollute can be sold or given to firms free.

A clarified and strengthened idea of property rights can also strike a balance between economic activity and pollution. For instance, a policy that provides private landowners with an incentive to protect endangered species on their land can be an effective environmental protection tool.

You can learn more about each of these specific types of market-oriented approaches in Types of market-oriented environmental tools.

How effective are market-oriented environmental policy tools?

Environmentalists sometimes fear that market-oriented environmental tools are an excuse to weaken or eliminate strict limits on pollution emissions and instead allow more pollution. It is true that if pollution charges are set very low or if marketable permits do not reduce pollution by very much then market-oriented tools will not work well.

But command-and-control environmental laws can also be full of loopholes or have exemptions that do not reduce pollution by much, either. The advantage of market-oriented environmental tools is not that they reduce pollution by more or less; it is that because of their incentives and flexibility, they can achieve any desired reduction in pollution at a lower cost to society.

Applying market-oriented environmental tools

Market-oriented environmental policies are a tool kit. Specific policy tools will work better in some situations than in others. For example, marketable permits work best when a few dozen or a few hundred parties are highly interested in trading, as in the cases of oil refineries that trade lead permits or electrical utilities that trade sulfur dioxide permits.

However, for cases in which millions of users who have no strong interest in trading emit small amounts of pollution—such as emissions from car engines or unrecycled soda cans—pollution charges will typically offer a better choice.

Market-oriented environmental tools can also be combined. Marketable permits can be viewed as a form of improved property rights. Or the government could combine marketable permits with a pollution tax on any emissions not covered by a permit.

Summary

The three main categories of market-oriented environmental policies are pollution charges, marketable permits, and better-defined property rights.
The advantage of market-oriented environmental tools is that, because of their incentives and flexibility, they can achieve any desired reduction in pollution at a lower cost to society than command-and-control regulation.

Self-check questions

Classify the following pollution-control policies as command-and-control or market-incentive based.

A state emissions tax on the quantity of carbon emitted by each firm.
The federal government requires domestic auto companies to improve car emissions by 2020.
The EPA sets national standards for water quality.
A city sells permits to firms that allow them to emit a specified quantity of pollution.
The federal government pays fishermen to preserve salmon.

A state emissions tax on the quantity of carbon emitted by each firm is a market-oriented environmental tool.

A federal requirement that domestic auto companies improve car emissions by 2020 is a command-and-control regulation.

The EPA setting national standards for water quality is a command-and-control regulation.

A city selling permits to firms that allow them to emit a specified quantity of pollution is a market-oriented environmental tool.

The federal government paying fishermen to preserve salmon is a market-oriented environmental tool.

An emissions tax on a quantity of emissions from a firm is not a command-and-control approach to reducing pollution. Why?

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lu yu
Posted 7 years ago. Direct link to lu yu's post “"The federal government p...”
"The federal government pays fishermen to preserve salmon."
why does this act classified as market-incentive approach? it doesn't belong to any of the three tools. in other words, what is the definition of market-incentive?
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(4 votes)
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- Ben McCuskey
  Posted 7 years ago. Direct link to Ben McCuskey's post “The government is offerin...”
  The government is offering an incentive to fishermen to preserve salmon, so it is using a market approach to try to obtain a desired result. Rather than passing a law that compels the fishermen to do a certain thing, it is offering a financial incentive for the fisherman to do a certain thing - in this case preserve salmon.
  Button navigates to signup page
  (12 votes)
davegreve
Posted 7 years ago. Direct link to davegreve's post “in the last question, im ...”
in the last question, im confused why an emissions tax would be better at instigating technological changes than a law prohibiting certain emissions. is it because a tax system would give the company more time to develop solutions rather than just shut them down?
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(3 votes)
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- qingwei.wong
  Posted 6 years ago. Direct link to qingwei.wong's post “In most cases simply proh...”
  In most cases simply prohibiting the emission is not practical because our technology is not so advanced. The firms would shut down as you mentioned if no emission is allowed. This brings social benefit lost. So the government's target is to limit the quantity of emission. An emissions tax gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions—as long as the marginal cost of reducing the emissions is less than the tax. Considering the emission control law, the firms have no incentive to reduce the emission any further when they meet the law requirement.
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  (4 votes)
han zengxiang
Posted 6 years ago. Direct link to han zengxiang's post “I want to ask what's the ...”
I want to ask what's the difference between marketable permit program and property rights.
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(0 votes)
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- gosoccerboy5
  Posted 4 years ago. Direct link to gosoccerboy5's post “Hi, Han ZengXiang! Market...”
  Hi, Han ZengXiang! Marketable permits are a certain amount of 'tickets' exchangeable for pollution given to firms. That is, a permit allows for a certain amount of pollution. They can then be traded among firms for money. Since firms maximize profits, they will choose the cheaper option (buy more permits or invest in greener technology), and the markets will lead permit prices to be equal to the price of investing in new technology.
  
  Property right reforms basically arrange who has to pay for externalities.
  
  Hopefully I've explained to you well enough the difference between property right reforms and marketable permit programs.
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  (2 votes)