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Hybrid_Notes - B Hybrid Price/Quantity Regulations The...

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Unformatted text preview: B. Hybrid Price/Quantity Regulations The problem with a pure emission fee or a pure quantity regulation is that if it turns out to be cheap to control pollution. we would like the firm to undertake more pollution con- trol. On the other hand. if it turns out to be very expensive. perhaps we can be a little more lenient. And we would like that flexibility built into a regulation. Unfortunately. pure price or quantity regulations do not have that flexibility. It is a relatively straight- forward step, however. to propose a quantity regulation coupled with a subsidy for emit- ting less than the firm is required and a penalty for emitting more. 1" This Situation is shown in Figure 10.6. As before. marginal savings can be high or low and the regulatgdoes not know which (the regulator knows the mean value of the marginal savings—MS). The regulatory scheme is that the firm is told to emit at“ but if it Figure 10.6 Permit system with penalty for overemitting and subsidy for under- emitting. MOW), Mflgjnal damage from emissions: M'SHle). Mae), M319}. mar— ginal savings from emitting: high-cost. av- erage. low-cost assumptions: 9‘. level of MDle} p ‘ ______ Emissions tee permit issuance; s. subsidy rate for un- deremiuing; 9L. emission rate if firm is “a. M349) low cost: p. penalty rate for overemitting: 9H. emission rate if firm is high cost. 578(9) ~~.. MsLle} 9|. 9' 9” Emissions (e) OBTAINING PRIVATE CONTROL COST lNFORMATION 189 Issmns as emits less, it will receive 3 for each unit of pollution under the limit. for a total payment to energy of ste“ - e). This of course is the same as the firm having to pay s(e - c“) = 32 — 59*. Bh- 1f ‘13- which is a negative quantity if e < 2*. Similarly. if the firm emits more than 2*. it will the max— pay a penalty—a total of p(e — 0*) = pe — pe*. In the first case the marginal cost of emis- :onn-ol on 2:23:12} t;;l::ecp:;l $22]: Purging opportunity cost of emissions is p; This is the s. cc III ' ' " ' in“ mere 105 ,9 < p. g Igure 10.6. which has the pig at e . In Figure : best suit in Figure l0.6. ifthe marginal savings turn out to be low {11159. the firm will choose ant region the subsidy. Why wouldn't the film just emit e" as told? Al e“, the marginal saving from it types 0f emitting pollution is quite low—lower than 3. Thus it is advantageous to receive a sub- usslon fee sidy to cut back emissions. since that subsidy exceeds the marginal cost of cutting back 0 imply a emissions. Emissions are cut back to the point at which marginal savings equal the sub- hat a mar- sidy (cl). Analagously, if marginal savings turn out to be high. at 9* the marginal sav- ee system ings from emitting a unit of pollution are highhhigher than the penalty from overernit- is resulted ling. Thus it is cost effective to emit more than allowed and just pay the penalty. Emissions stilts sug- will occur when marginal savings equal the penalty (en). What is the inefficiency of such a scheme? Remarkably. in the simple example of Figure 10.6. there is no inefficiency. No matter what the true marginal savings. the firm‘ will emit exactly the right amount. Of course if marginal savings can take on more than two values. which is probably more common. we cannot achieve complete efficiency with tturns out this approach. Intuitively. since we have more flexibility with this approach than with ution con- pure fees or quantities, we must be able to do better than a pure emission fee or a pure be a little quantity regulation. This is in fact the case. irtunately. One way to understand this result is to look at the complete solution to our prob- ? straight- lem. That is to present the marginal damage schedule to the firm and tell the firm to emit ,r for emit- wherever the marginal damage schedule crosses the true marginal savings function (which is unknown to the regulator but known to the firm). A pure quantity regulation can be be high or viewed as approximating this marginal damage function with a vertical line through 0*. due of the A pure emission fee can be viewed as approximating this with a horizontal line through 9" but if it p". The hybrid system can be viewed as approximating the marginal damage with a step function (shown as a dashed line in Figure 10.6). Clearly we can get a better approxima- ' ' tion with a ste function. .rith penalty p ...
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