2008_04_08_Solutions - Pollution fee vs pollution reduction subsidy In the short run Assume Price of good is fixed Tax rate t = subsidy rate s>

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Unformatted text preview: * Pollution fee vs pollution reduction subsidy In the short run Assume: Price of good is fixed Tax rate t = subsidy rate s > O VC(0.0) = O Symbols: p: Price of the good y y: Quantity of good output e: Quantity of emissions FC: Fixed cost. Unavoidable in the short run. VC(y,e): Total variable cost of prodUcing y and e, excluding fee payments Firm is charged te: nu pug-11,50: ,7- Fce V649,.) - {a be fgcw JVC("¢ VJ. ._ y: r-_—S;Zl—l =0 Baum-Ac: 'w-+=a 3‘" ac ‘ ‘ . 0", 9") g It, 4‘. «ga- 3 cg. Jd Pollution fee vs pollution reduction subsidy In the short run Let e be a'fixed quantity of emissions greater than what ‘ the firm would choose with no subsidy. l Firm receives s(é-e2: View: pr- FC ' VC/ly’e) * 5 (0-0) Fae: " W.I'.".a y: r’wc( '39 g a r * . " w-V' - gr - DVC(:.9-$ g a 30 So»! u or“ foe Same result with subsid as with tax? JQFh-a u." c '0 91° ' Pf. VC(750*)-fe*¢0 $4.5... . , , t... a Ive k-cv “MI ’f’- vc (Ines) ., Steady) 31L,FC -“' > P”- (7*: "’2 9 Pu. A“: 50 6‘00!“ [0.0) “J M‘soJI 6"," (,*’..), PW— V663 2")»M )0 > ’7“ V66”, o")-¥0 . on...» m..- ‘ .r I». .2, we male» 1&0 on] «La/7. Pollution fee vs. pollution reduction subsidy In the long run Suppose : MC 8 A», Lie, (or, 1. emissions e are proportional to goods output y. 2. each finn’s average total cost function is U-shaped. 3. all firms, including new entrants, have same cost function, so that long-run supply (LRS) is flat. Let yi" denote zero-subsidy output s denote subsidy per unit of output reduction so total subsidy to i is s(§i‘-— yi) Individual firm i AW; «1/ free Goods output 5; E’ s output Y ‘ ' or caisson; E Result: Pollution reduotion subsidy can cause higher emissions than tax in long run and can even increase goods output and aggregate emissions. However, this would be attenuated if emissions sould be controlled seoaratelv from outout. ...
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This homework help was uploaded on 02/19/2009 for the course AEM 4510 taught by Professor Shawhan,d. during the Spring '08 term at Cornell University (Engineering School).

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2008_04_08_Solutions - Pollution fee vs pollution reduction subsidy In the short run Assume Price of good is fixed Tax rate t = subsidy rate s>

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