Which one of the following is NOT one of the policies to reduce deadweight loss from a negative externality? A) Tax/fee for polluting B) “Untradable pollution permits” C) Minimum compliance standards D) Ban the activity entirely E) Subsidies for not polluting
The correct answer and explanation is:
The correct answer is E) Subsidies for not polluting.
To explain, deadweight loss from a negative externality occurs when the social cost of a harmful activity, like pollution, is not reflected in the market price. This leads to overproduction or overconsumption of goods or services that cause harm to society. Several policies are designed to internalize this externality, ensuring that producers and consumers take into account the social costs, which can reduce deadweight loss.
A) Tax/fee for polluting:
A tax or fee imposed on the activity causing the pollution makes producers and consumers account for the external cost. For example, a carbon tax would charge a company for every ton of carbon dioxide it emits, encouraging them to reduce emissions or invest in cleaner technologies. This aligns private costs with social costs, reducing overproduction of harmful goods and services.
B) “Untradable pollution permits”:
Untradable pollution permits work by limiting the total amount of pollution that can be emitted, and each firm is given a specific number of permits. Firms can’t trade these permits, which means they have a fixed amount of pollution they can produce. This policy also aims to internalize the cost of pollution, and it effectively reduces emissions to a level where social costs are considered.
C) Minimum compliance standards:
Minimum compliance standards involve setting legal limits on the amount of pollution a firm can emit. This is a regulatory approach that directly targets polluting behaviors, requiring firms to meet certain environmental standards. While it may not always be the most efficient policy, it can reduce the overproduction of negative externalities by ensuring that firms comply with pollution control measures.
D) Ban the activity entirely:
Banning the activity entirely is an extreme measure but is used in cases where the harm caused by the externality is severe, like in the case of dangerous chemicals or practices. While this would reduce deadweight loss by eliminating the negative externality, it is often not feasible in many cases where alternatives can mitigate harm.
E) Subsidies for not polluting:
Subsidies for not polluting could encourage firms to adopt cleaner practices or technologies. However, this approach does not directly address the problem of negative externalities. Subsidies could also distort market behavior by incentivizing companies to focus more on receiving subsidies than on genuinely reducing pollution, which could lead to inefficiency and a lack of real change in pollution levels.
In conclusion, subsidies for not polluting would not directly reduce deadweight loss caused by a negative externality in the same way that taxes, regulations, or bans would.