NEED TUTORING HELP answering these questions below. Based on microeconomics help text (posted below)

Carbon Dioxide is a major contributor to climate change (never mind what the Fox Channel says--it's true).

1. Which of the methods described in the text makes more sense. Why?
2. Which of the methods is most similar to the $0.05 deposit on a soda bottle? Should the $0.05 deposit be applied to plastic water bottles?.

HELP TEXT

Cap-and-trade systems and carbon taxes are two approaches to reducing carbon dioxide (CO2) emissions.

Externality problems are property rights problems. Consider a landfill. Because the owner of the landfill has full rights to his land, people wishing to dump their trash into the landfill have to pay him. This payment implies that there is no externality: He happily accepts their trash in exchange for a dumping fee. By contrast, because nobody owns the atmosphere, all air pollution is an externality, since there is no way for those doing the polluting to work out a payment to compensate those affected by the pollution or for those threatened with pollution to simply refuse to be polluted on.

Conventional property rights therefore cannot fix the externalities associated with air pollution. But that does not mean property rights can't help fight pollution. The trick to making them work is to assign property rights not to the atmosphere itself, but to polluting the atmosphere. This is done in "cap-and-trade" systems, under which the government sets an annual limit, or cap, to the number of tons of a pollutant that firms can emit into the atmosphere.

Consider carbon dioxide, or CO2. It is a colorless, odorless gas that many scientists consider to be a contributing cause of climate change, specifically global warming. To reduce CO2 emissions, the U.S. government might set a cap of 5 billion tons of CO2 emissions per year in the United States (which would be about 10 percent below 2009 emissions levels for that molecule). The government then prints out emissions permits that sum to the limit set in the cap and distributes them to polluting firms. Once they are distributed, the only way a firm can legally emit a ton of CO2 is if it owns a permit to do so.

Under this policy, the government can obviously adjust the total amount of air pollution by adjusting the cap. This by itself improves efficiency, because the cap imposes scarcity. Because each firm has only a limited number of permits, each firm has a strong incentive to maximize the net benefit that it produces from every ton of pollution that it emits. But the cap-and-trade scheme leads to even greater improvements in efficiency, because firms are free to trade (sell) them to each other in what are referred to as markets for externality rights.

For instance, suppose Smokestack Toys owns permits for 100 tons of CO2 emissions and that it could use them to produce toy cars that would generate profits of $100,000. There is a power plant, however, that could make up to $1 million of profits by using those 100 tons of emissions permits to generate electricity. Because firm can trade their permits, Smokestack Toys will sell its permits to the power plant for more than the $100,000 in profits that it could make if it kept them and produced toy cars. And the power plant will gladly pay more than $100,00 for those permits, because it can turn around and use them to make up to $1 million of profits by using them to generate electricity.

Society will benefit hugely from this transaction, because while 100 tons of CO2 will be emitted no matter which firm uses the permits, society will receive much greater net benefits when they are used by the power plant, as indicated by the fact that the power plant can produce much larger profits than the toy company when using the same amount of this scarce resource.

Several words of caution, however! Cap-and-trade systems have proven very difficult to implement in cases where it is difficult for regulators to effectively check whether firms are obeying the system. This has been a major problem with the European Union's cap-and-trade system for CO2 emissions. Because nearly every type of industrial activity releases CO2 into the atmosphere, enforcement involves monitoring many thousands of factories of all sizes. That is very difficult and cheating has resulted. In addition, politically connected industries got politicians to give them exemptions or free permits.

By contrast, a cap-and-trade system on sulfur dioxide emissions from coal-burning public utilities has worked well in the United States since the 1980s. But in that case, there were only a few hundred polluting utilities, and they were already being monitored for emissions. So there was little ability to cheat. In addition, all of the firms were treated equally, with no firms allowed exemptions or free permits.

Due to the mixed results, many economists have concluded that a cap-and-trade system would not be the best way to curb CO2 emissions in the United States. They believe that there are simply too many sources of pollution to make monitoring either possible or cost-effective. And it seems likely that politically connected industries will be granted exemptions. So, instead, many economists favor a carbon tax, which would involve taxing each ton of coal, each gallon of gasoline, and each barrel of oil on the basis of how much carbon it contains (and thus how much CO2 will eventually be released into the atmosphere when it is used). By raising the cost of polluting, the tax would reduce consumption and lessen the externalities associated with CO2 emissions. It would also be nearly impossible to evade, so that we would not have to worry about cheating.

To serve the public, politicians need to get elected. To stay elected, officials (presidents, senators, representatives, mayors, council members, school board members) need to satisfy their particular constituencies.

At best, the political realities complicate government's role in the economy; at worst, they produce undesirable economic outcomes.

In the political context, overregulation can occur in some cases; underregulation, in others. Some public goods and quasi-public goods can be produced not because their benefits exceed their costs but because their benefits accrue to firms located in states served by powerful elected officials. Inefficiency can easily creep into government activities because of the lack of a profit incentive to hold down costs. Policies to correct negative externalities can be politically blocked by the very parties that are producing the spillovers. In short, the economic role of government, although critical to a well-functioning economy, is not always perfectly carried out.

Economists use the term "government failure" to describe economically inefficient outcomes caused by shortcomings in the public sector.