Arnold Kling

Economics and Pollution Control

Arnold Kling, Great Questions of Economics
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Paul Krugman seems to devote most of his columns to portraying the Bush Administration as the captive of evil corporations. On rare occasions, however, he mixes in a little economics, as he does in today's column.

Back in the 1970's the Clean Air Act set strict rules, but only for "new" sources of pollution. Existing power plants, factories and so on were grandfathered. The idea was that over time, old, dirty facilities would close down.

The result was predictable. Polluters kept those old facilities operating, precisely because they were exempted from the new rules. Indeed, corporations poured money into existing power plants and factories, expanding their capacity, rather than build new ones.

...There ought to be a better way, and there is. It's called "cap and trade." Under cap and trade, existing pollution sources receive permits to emit specified amounts of pollutants--but they can sell those permits to others. This creates an incentive to reduce pollution from old facilities in order to free permits for sale.

Discussion Question. Economists see these sorts of market mechanisms as having more predictable results in controlling pollution, while also minimizing the cost of obtaining cleaner air. What makes regulation more attractive to environmentalists?

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