In class we have often used the example of pollution as one of those negative externalities that is difficult to measure and regulate. Pollution is indeed a complex topic to tackle, but it impacts our lives tremendously. Many health problems including asthma, cancer, learning disabilities, metabolic conditions, and more are linked to the environment in which we live. Pollution control measures, including the Clean Air Act, created problems for many firms. It is expensive to meet pollution control specifications which put some firms out of business. In our textbook, the author points out the proposition economists made in response to firms' compaints. He sats that economists came up with the "cap-and-trade" policy in which pollution is reduced just as much as it was with the former policy yet these achievements are made at a lower cost overall. The "cap" is the government set level of how much pollution can be created or emitted. "Firms that reduced emissions by less than the required limit could buy polluttion permits from other firms that reduced their emissions by more than their limit". Firms with a lower cost of reducing their emissions can achieve greater reductions than firms with high costs of reducing their emissions. The firms with the lower costs can trade their permits (the amount of left over pollution they can still create) to firms that have higher costs. The price of permits was established "in an 'emissions permit market'" which is kind of similar (I think) to what we saw on Aplia today in the Hunting and Fishing Experiment in which permits were introduced. Pollution control is also mentioned in the textbook in the discussion of incentive policies as a way to deal with externalities (Chapter 18). Effluent fees (or taxes on pollution) seem to be a good idea because the person who reduces their pollution the most pays the lowest amount in taxes. Another benefit is that "with the tax, the invisible hand guides the traders to equate the marginal social cost to the marginal social benefit and the equilibrium is socially optimal".
I think the cap-and-trade is good because it achieves the same reduction at a lower cost, but I think a problem arises regarding distribution of pollution. Firms with high costs of reducing their pollution will end up polluting their surrounding environment more. For people in the community where these firms are, this cap-and-trade may really hurt them.