Correcting the Market

This lecture delves into the concept of correcting market failures caused by externalities through the use of environmental policy instruments. The instructor explains how permits can be auctioned off to regulate production, ensuring that only the most efficient producers continue while compensating those who are unable to produce. The discussion covers the impact of external costs on market equilibrium, the role of tradable permits in optimizing production, and the dynamics of permit trading. Various scenarios are explored, including the effects of different permit allocation methods and the implications of varying external costs. The lecture concludes by highlighting the importance of considering externalities in market transactions and the potential benefits of implementing environmental policies to address them.