ECO401 VU Midterm Papers Spring May 2012

Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market’s scope. These are called externalities. As a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant, answer the following questions:

1.What two policies could you use to reduce the total amount of emissions?

2.Why do you think they each would work?

3.What would the benefits of each action be (besides emissions reduction)?

4.What would the costs of each action be?

5.How would you decide what was the best level of emission reduction?