Hybrid

• Hybrid measures are a combination of command and control and market based system of resolving externalities.
• To reduce production of a certain good, the ' cap and trade ' principle is used, where a cap is set on the total amount of the good can be produced by a party. This cap would be reduced over time, and parties can buy/receive allowances that can be traded with other parties.
• The government can put up permits in the market for sale through a system of auction, permitting buyers to do certain activities whilst allowing them to trade permits once they are done with it.
• Sunk cost fallacy arises when a person's decision is affected by fixed rather than marginal costs. Hence there is a tendency to continue in an activity once an investment has be made.
• Flaws of the hybrid measures:

  • Cognitive biases
  • Imperfect information
  • Monitoring and enforcement
  • Political resistance
  • Effect on the government's budget
  • Effect on the government's microeconomic goal of equity