2008_02_19_Solutions - Goal (like Pigou): Find the...

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Unformatted text preview: Goal (like Pigou): Find the constant, per-unit pollution fee that induces the efficient amount of pollution Setup: M, pollutant emissions: Some measure of pollution emissions, depending on context. For example, it could be emissions per period of a particular pollutant from a particular source. Assumption 1: Firm can control M separater from goods output. S(M), savings from beim allowed to produce lernissions at rate M: For a given level of output, the polluter actually saves money by polluting more, up to some point, or else would not pollute. Because doesn’t have to spend money controlling or preventing emissions. 3 ,4 MSW)I marginal saviggs from emissions at rate M: The first derivative of S(M). Approximately equal to the additional savings from being allowed to emit one more unit of pollution. DgM), damage function: A function indicating the magnitude of damage as a function of emissions rate M. Often, damage is conceived of as the minimum amount of money the affected parties would be willing to accept in order to accept the emissions. There can be individual and aggregate damage functions. (summation) (damage function) pm, MDgM), marginal daer function: The first derivative of the damage function. Rate of increase of damage as pollution M increases. no. NB(M), net benefits of emission rate ll! NB(M) = S(M) — mm 3 S _ M n g, per-unit mllution emission fee imgo_se£ on mlluter: In the absence of prior distortions other than externality, Pigovian fee resuits in optimal amount of externality, by design Consumption-consumption extemality Production-consumption extemality J p e r can, 97‘ . Situation1: No marginal e .. cost(MEC) ...
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2008_02_19_Solutions - Goal (like Pigou): Find the...

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