Is Direct Control A Good Policy To Correct Externalities?


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Tariq Habib answered
For almost all pollution, as well as other health and safety externalities, governments rely on direct regulatory controls; these are often called social regulations. For example, the 1970 Clean Air Act reduced allowable emissions of three major pollutants by 90 percent. In 1977, utilities were told to reduce sulphur emissions at new plants by 90 percent. In a series of regulations over the last decades, firms were told they must phase out ozone depleting chemicals. And so it goes with regulation.
While it is possible that the regulatory might choose pollution control edicts in a way that guarantees economic efficiency, in practice that is not very likely. Indeed, much pollution control suffers from extensive government failures. For example, pollution regulations are often set without comparisons of marginal costs and marginal benefits, and without such comparisons there is no way to determine the most efficient level of pollution control. Indeed, for some regulatory programs the law specifically prohibits cost benefit comparison as a way setting standards. In addition standards are inherently a very blunt tool. Efficient pollution reduction requires that the marginal cost of pollution be equalized across all sources of pollution.

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