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- Can society regulate annoying behavior by just telling people what to do?
- An alternative to the Pigouvian tax or subsidy solution is to set a quota. Quotas can be maxima or minima, depending on whether the activity generates negative or positive externalities.
- Quotas are a much more common regulatory strategy for dealing with externalities than taxes and subsidies.
- The goal of a quota is to limit the quantity to the efficient level.
- Quotas tend to harm new entrants compared to existing firms and discourage the adoption of new technology.
- If a quota is set to the socially efficient level, how does the value of a quota right compare to the Pigouvian tax?
- Speeding (driving fast) creates externalities by increasing the likelihood and severity of automobile accidents, and most countries put a limit on speed; but one could instead require fast drivers to buy a permit to speed. Discuss the advantages and disadvantages of “speeding permits.”