market activities (production, buying, and selling) have unintended positive or negative effects outside the market’s scope, like pollution

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market’s scope, like pollution. These are called externalities.

Assume that you are a policy maker concerned with correcting the effects of gases and particulates emitted by a local power plant. Write a 1-page memo that addresses the following points:

  • Select 1 of the following policies from the following list that you think would best reduce emissions: Pigouvian taxes, emission taxes, or cap and trade. Explain it.
  • Why do you think your policy would work in reducing the total amount of emissions?
  • In your answer, explain the costs and the benefits of the production and consumption of the good, as well as the negative externality.
  • How would you decide what the best or optimal level of emission reduction would be? 

Format your answers as a memo with 1 page of written content. You may use bullet points, but please cite your sources. Include a reference list.

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