Could U.S. pollution regulations help smog-enshrouded China? Beijing officials i
ID: 1110434 • Letter: C
Question
Could U.S. pollution regulations help smog-enshrouded China?
Beijing officials issued a "red alert" for air quality, closed schools, limited automobile traffic, and kept people indoors to avoid toxic smog. Most of Beijing's energy comes from carbon-emitting coal. The U.S. EPA is working with China to develop a national cap-and-trade system.
Source: The Christian Science Monitor, December 8, 2015
Explain the inefficiency in Beijing's market for electricity and contrast it with the U.S. market.
How can cap-and-trade achieve an efficient outcome?
The Beijing market for electricity is inefficient because _______.
A.electricity production has a large external cost arising from carbon emissions from coal-powered generators
B.all of the people who need electricity have access to electricity
C.electricity producers deny the existence of a large external cost
D.the market produces a quantity of electricity at which marginal benefit exceeds marginal social cost
Comparing the U.S. market for electricity and the Beijing market for electricity, the U.S. market is _______ inefficient.
A.equally
B.less
C.more
Cap-and-trade can achieve an efficient outcome by _______.
A.requiring power utilities to meet EPA regulations
B.confronting power utilities with the marginal social cost of their production
C.forcing power utilities to pay a tax equal to the marginal external cost of production
D.fining power utilities that produce more than the efficient quantity
Explanation / Answer
An inefficeint market is that market which does not actually reflect true value of price of a commodity in free forces market equilibrium price and hence the quanity that get determined is not also efficient.
Beijing's electricity market decides its quanity demanded of electricity and equilibrium price of electricity based upon demand and supply only. It only consider private cost and ignore social cost which undervalue the cost of electricity hence does not refkect true picture of price. That is why the market is inefficeint.
Cap and trade is a measure that government uses to have control over pollution emitting through production and consumption activities. It involves providing economic incentives for acheiving reductions in emission of pollutants. Government issues permits with which firms can pollute to given level only. And if they want to emit more by producing more of through other means then they can trade with other firms having permits for more permits.
When this sytme gets applied then this sytem will make producers reduce emissions most cheaply, including the social cost as well. This will make market efficeint.
The Beijing market for electricity is inefficient because _______.
A.electricity production has a large external cost arising from carbon emissions from coal-powered generators
Comparing the U.S. market for electricity and the Beijing market for electricity, the U.S. market is _______ inefficient.
B.less
Cap-and-trade can achieve an efficient outcome by _______.
B.confronting power utilities with the marginal social cost of their production.