THE PREFERRED EXTERNALITIES-CORRECTING SYSTEM FOR PRACTICAL APPLICATION

Abstract

This study sets two goals which are represented by the answers to the following two basic questions. What are the possibilities of national policy-makers in terms of the efficient correction of negative externalities? Since available externality correction systems give suboptimal ex post results, which system is preferable, and under what conditions? The possibilities of the policy-maker to ensure the social optimum are determined by ‘enlightenment’ (‘knowledge’) and ‘commitment’ to social goals. When the actual (ex post) marginal private costs for emission reduction are higher than the planned (ex ante) marginal private costs for emission reduction, and when the marginal social benefit is elastic, the Cap-and-Trade system is more undesirable than the price system. When the actual (ex post) marginal private costs for emission reduction are greater than the planned (ex ante) marginal private costs for emission reduction, and when the marginal social benefit is inelastic, the price system is more undesirable than Cap-and-Trade system.