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Cap and Trade Policy (Essay Sample)


Sometimes market activities (production, buying, and selling) have unintended positive or negative effects outside the market's scope. These are called externalities. Assume that you are a policy maker concerned with correcting the effects of gases and particulates emitted by a local power plant. Write a 1-page memo that addresses the following points:
•Select 1 of the following policies from the following list that you think would best reduce emissions: Pigouvian taxes, emission taxes, or cap and trade. Explain it. 
•Why do you think your policy would work in reducing the total amount of emissions? 
•In your answer, explain the costs and the benefits of the policy that you choose. 
•How would you decide what the best level of emission reduction was? 
Format your answers as a memo with 1 page of written content. You may use bullet points, but please cite your sources. Include a reference list.


Econ Unit 4IP
Company Name
Company Address
Date of the memo
Subject: Cap and Trade policy
Pollution is a globe problem that is facing many developed and developing countries. Measures are being put in place to ensure that air, water and soul pollution is minimized. Industrialization is one of the leading causes of air pollution. Air pollution has devastating effects on everyone, the leading being global warming. Policy makers are trying to find measures that best minimize pollution (Desonie, 2007).
Emission trading popularly known as cap and trade is the best policy to reduce emission. It works through providing economic incentives to those that work to reduce pollution. The government sets the limit on the allowed level of pollutant to be produced (Goulder, 2013).The government issues these permits to companies representing the right to discharge a specific amount. This allowance cannot exceed the level set by the government. Companies that do not pollute more can sell their allowances to companies that may wish to increase their emission. Thus those who pollute less are rewarded and pollution is reduced at the lowest cost to society. (Jaccard & Nyboer, 2002)
Cost and benefit analysis can be used to justify eliminating pollution. This analysis consists of two levels. First the society decides on the optimal level of pollution and then decides on how to eliminate the pollution. A recent analysis conducted by the Environmental Protection Agency (EPA) showed that the benefits of cap and trade outweighed the cost. The analysis estimated the expected aggregate benefits of the emission reduction between now and 2050 to be $15 trillion. The expected cost on the other hand was estimated to be over $600 trillion (Jaccard & Nyboer, 2002). From the analysis it is clear that the cap and trade policy is not only the best policy to implement but also has incredible benefits.

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