Econmic Incentive Assignment Example | Topics and Well Written Essays - 250 words

Econmic Incentive - Assignment Example Externalities are the effects emerging from consumption or production of services and goods for which no appropriate money is paid. Externalities cause market failure in the event the price mechanism does not consider social benefits and costs. Since environmental resources are free, people tend to overuse them thus leading to environmental destruction. Economic incentives aim to repair this scenario by placing a price for environmental destruction. Due to this, some environmental resources such as minerals are bought and sold thus, limiting people from overusing them. In the end, the environment is protected. 7. When compared to traditional regulatory approaches, do incentives-mechanism based increase the cost of effectiveness of pollution control? What is the evidence? How might high transaction costs interfere with the effect of incentives? Incentives-based mechanism increases the cost of effectiveness because they offer a more cost effective way of attaining environmental quality. There is clear evidence of their effectiveness in the sense that since their introduction, pollution has decreased, as industries are more conscious not to pollute the environment. If the transaction costs are raised, then it will force the government to reduce economic incentives. Traditional approach allowed industries to take control of pollution control efforts to an extent that would result in cost-effective distribution of pollution control burden. This in turn did not work as firms used inexpensive production technologies. Incentive-based approaches encourage industries to apply expensive production technologies, which would result in less cost incurred in controlling pollution. This approach will impose tax on pollution and activities that produce pollution. This in turn will encourage firms to adapt modern production technologies and devices that would make them pay less. Industries will realize past pollution costs and be encouraged to conduct profit and loss