Question

Consider a policy proposal to impose more stringent controls on automobile tailpipe exhausts. Distinguish between the explicit and implicit costs of this proposal, and support your discussion with several specific examples of each.

Answer 1

Consider a policy proposal related to the environment would incur costs known as incremental cost calculated by first identifying the existing policy expenditure then estimating the cost after the policy is implemented and then taking a difference of the two costs. It reflects changes in economic costs which includes both implicit and explicit costs. The explicit cost of implementing an environmental policy includes administrative, monitoring and enforcement expenditure which is paid by the public sector. Implicit costs are those concerned with nonmonetary expenses that negatively affects society's well-being. For example, the value of declined product variety because of a ban on some inputs.