Command and control systems are less flexible than incentive based systems due to the following reasons. First, Command- and- control system of economies relies exclusively on the government to allocate resources, which owns them, and all the factors of production unlike the incentive based system where resources are owned by the public and allocated by market forces. Secondly, in command- and –control systems there is no application of the interplay of the demand and supply curves to determine the pricing mechanism making it more rigid, unlike the incentive based system where this interactions are used in determining market prices.
When handling externalities, the cap- and- trade is more effective than the emission fee policy since it puts a limit to the maximum amount of pollution that an industry can release to the environment. The government issues permits to the companies which cover every unit of pollution that they produce thus generating income. On the other hand, emission fee entails a system that imposes tax on each unit of greenhouse gases emitted by a company without restricted the amount produced. As such, emission fee policies generate more income to the government but they are not effective in protecting the environment since the company pays.
Several problems arise in applying the Coase theorem to solve externalities, one of them being, there can be a lack of information or interest to the public in solving these problems. The Coase theorem assumes that the public has relevant information to an externality which may not be the case. The second problem with the Coase theorem is that there is difficulty in assigning property rights to various parties. Finally, the third problem is that it is difficult to coordinate if several parties are involved since they all have different and conflicting interests.