In each of the following situations, explain how government intervention could improve society’s welfare by changing people’s incentives. In what sense is the market going wrong? (2-part answers)
a. Pollution from auto emissions has reached unhealthy levels.
Increase taxes on cars that produce more than the minimum for auto emissions.
The government could intervene by offering a financial incentive in the form of a tax rebate to those individuals who purchase a new, highly efficient automobile.
In the case of pollution from auto emissions reaching unhealthy levels, government intervention can improve societal welfare by changing people's incentives. The market is going wrong in the sense that it is not accounting for the negative externalities associated with auto emissions, which are harmful to both human health and the environment.
1. Implementing pollution taxes or carbon pricing: By imposing taxes or pricing mechanisms on auto emissions, the government can increase the cost of pollution for individuals and businesses. This creates a financial incentive for people to reduce their emission levels. Higher costs associated with emissions encourage individuals to seek cleaner and more sustainable alternatives such as using public transportation, electric vehicles, or investing in emission-reducing technologies.
To get the answer, one can analyze the concept of negative externalities associated with pollution and examine economic principles such as Pigovian taxes, which aim to internalize these external costs.
2. Developing stricter emission standards: The government can set and enforce stricter regulations and emission standards for automobile manufacturers. This will incentivize manufacturers to invest in research and development of cleaner technologies in order to comply with the regulations and avoid penalties. Stricter emission standards can also foster innovation and competition among manufacturers, leading to the development of more efficient and environmentally friendly vehicles.
To understand the benefits of stricter emission standards, one can study the concepts of regulatory policies, their impact on industry behavior, and the role of government in setting and enforcing standards to address market failures.