Author Question: List and briefly define the three methods government can use to cope with an external cost, such as ... (Read 78 times)

ashley · **on:** Jun 29, 2018

List and briefly define the three methods government can use to cope with an external cost, such as pollution.

What will be an ideal response?

Question 2

Explain why the costs of most services like haircuts and college education have risen at a faster rate relative to the costs of manufactured goods?

What will be an ideal response?

aloop · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The three methods are emission charges, cap-and-trade, and taxes. Emission charges set a price per unit of pollution that the firm pays to the government. With a cap-and-trade policy, the government issues marketable permits to firms that allow them to pollute by an amount assigned by the permit. The permits can be bought and sold among firms. Taxes can be imposed on polluting firms. If this tax equals the marginal external cost, efficiency can be attained.

Answer to Question 2

Manufactured goods enjoy more productivity gains most of the time over services. The reason is that machines can do more and more of the work with technological breakthroughs. However, gains in productivity in cutting hair and college education are harder to come by as the primary input in both is human and requires a relatively fixed mix of human and capital inputs in the production process.