Students / Subjects

Handbook >> Environmental Economics >> Techniques of Pollution Control >>

Beauty of the System

No high information costs are incurred, as they are with the command and control system, or the higher information costs of green taxation regimens. This is because those methods require the knowledge of a firm’s Marginal Abatement Cost (MAC), as the regulations are set by and change with these costs. This is unnecessary in cap-and-trade markets since the government just sets the cap, monitors the emissions and the market, and let’s free-market capitalism control the rest. This flexible market allows firms with high-abatement costs to buy permits from  low-abatement cost firms. This is economically advantageous to both firms, as one firm avoids high costs associated with abating its toxins, and the other firm makes money off of its unused permits. This allows the market to reach the target reduction, but at a lower overall cost than other techniques (Schmalenesee).

Next to Requirements
Back to Correcting Externalities: Pollution

Copyright 2006 Experimental Economics Center. All rights reserved. Send us feedback