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    Externalities: Two Policy Options To Reduce Emissions

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    Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are called externalities. As a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant, answer the following questions:
    1.What two policies could you use to reduce the total amount of emissions?
    2.Why do you think they each would work?
    3.What would the benefits of each action be (besides emissions reduction)?
    4.What would the costs of each action be?
    5.How would you decide what was the best level of emission reduction?

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    Solution Preview

    1. I could levy an emissions tax on the owners of the plant, or I could legislate an emissions limit.
    2. The emissions tax would increase the cost of production for the plant, encouraging the owners to reduce production. The emissions limit would allow me to take legal action to shut down the plant if it emitted too much pollution. ...

    Solution Summary

    Economic analysis of two policies that could be used to reduce harmful emissions.