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.