Regulating Market Externalities: Taxes vs. Quotas

This lecture delves into the concept of externalities in a market, focusing on pollution costs not accounted for by producers. The instructor explains the distinction between market equilibrium and optimal equilibrium, discussing the use of taxes and quotas to internalize external costs. While taxes face challenges in environmental policy, quotas, or prescriptions, are explored as a more accepted alternative. The lecture further delves into the efficiency of tradable quotas in achieving market equilibrium and ensuring that the highest bidders, with the greatest value for the good, obtain the quotas. The discussion extends to the auctioning of quotas, the value of quotas to producers, and the mechanisms to balance supply and demand through market mechanisms.