Microeconomics

Unit 4 IP

Pure, Per Se, and Natural Monopolies

September 16, 2012

Krugman stated, “Externalities are actions that create side effects that are not

properly taken into account. Externalities are one of the principal sources

of market failure” (p.434). Two policies that can be used to reduce the total amount of emissions is

emission taxes and tradable permits. Krugman stated, “Emissions tax is a tax that is

charged depending on the amount of pollution a factory produces” (p.442).

Factories are taxed on every unit of pollution produced. The benefit of charging an

emission tax is you are giving the factory reason to reduce pollution. They are

paying for or being taxed for every unit of pollution they produce. The factory can

impose the tax on the consumer, which in turn will decrease supply. When prices

are increased, the market quantity or quantity being produced is decreased.

Emission tax will decrease the marginal social cost because less pollution will be

released. That leaves less cost to the society to clean it up. The marginal social

benefit on the other hand will increase because the marginal social cost is

decreased. The marginal social benefit is increased because of the money that the

society is saved from decrease in the marginal social cost. Therefore, creating the

optimal level of pollution. Emissions tax helps to solve the problem of economic

inefficiency by allowing factories to maximize profits and pollute at the most

efficient level. One of the disadvantages of emissions tax is that it is difficult to

determine the amount of tax that should be charged. If the tax charged is too low,

not enough pollution will be eliminated. If the tax charged is too high, an efficient

amount of pollution will be reduced. Some factories may be able to avoid