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I had a difficult time in the past to explain liquidity risk management and ratios.
Now I know what to do. Problem solved!
I will use a pollution-mitigating technology, like scrubbers to explain liquidity risk.
Mr. Jeremy C Stein, Member of the Board of Governors of the Federal Reserve System explained how:
"Suppose we have a power plant that produces energy and, as a byproduct, some pollution.
Suppose further that regulators want to reduce the pollution and have two tools at their disposal:
They can mandate the use of a pollution-mitigating technology, like scrubbers, or they can levy a tax on the amount of pollution generated by the plant.
In an ideal world, regulation would accomplish two objectives.
First, it would lead to an optimal level of mitigation - that is, it would induce the plant to install scrubbers up to the point where the cost of an additional scrubber is equal to the marginal social benefit, in terms of reduced pollution.
And, second, it would also promote conservation:
Given that the scrubbers don't get rid of pollution entirely, one also wants to reduce overall energy consumption by making it more expensive.

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