How do command-and-control policies differ from market-based policies in addressing externalities?

• A. Command-and-control sets specific standards or technologies; market-based policies (taxes, subsidies, cap-and-trade) use price or quantity incentives to achieve cost effectiveness.
• B. Command-and-control uses price signals; market-based sets technology standards.
• C. Command-and-control focuses on distributional concerns; market-based focuses on efficiency.
• D. Command-and-control relies on voluntary compliance; market-based relies on regulations.

Answer: (A)

Addressing externalities can be achieved either with command-and-control rules or with market-based incentives. Command-and-control sets specific standards or mandates—the government requires a particular technology or a fixed emission limit, with penalties for failing to meet it. Market-based policies use price or quantity incentives to reach the environmental goal more cost-effectively: taxes place a price on pollution, subsidies encourage beneficial activities, and cap-and-trade fixes an overall limit and allows firms to trade permits. Because firms respond to these incentives, reductions occur where they are cheapest, lowering total abatement costs for a given target. The other descriptions mix up the mechanisms: price signals are a feature of market-based policies, not command-and-control; relying on regulations alone misses the incentive-driven flexibility; and voluntary compliance doesn’t capture the mandatory enforcement typical of command-and-control.