BASD505 Course Notes 6

BASD505 Course Notes 6 - Emission Taxes Consider a single...

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Unformatted text preview: Emission Taxes Consider a single rm that is subject to an emission tax of $ t per unit As long as the rm pays $ t for each unit it emits, it is free to emit as much pollution as it wants E U MAC emissions $/unit t The rm can deal with each unit of emissions in two ways emit the unit and pay the tax abate the unit and pay the associated abatement costs Assuming the rm will do what's cheapest if the rm's MAC is more than t , the rm will emit and pay the tax if the rm's MAC is less than t , the rm will abate and avoid paying the tax So the rm will reduce its emissions to E $/unit E U MAC emissions t t 1 How would the rm react if the regulator increased the emission tax from t to t 1 ? The rm will reduce emissions to E 1 s CONCLUSION: Under an emissions tax 1. the larger the unit tax, the fewer emissions the rm will release 2. if the regulator knows the rm's MAC function, it can induce the rm to reduce emissions to any desired level by setting the appropriate tax rate BASD 505 Lecture 6: page 2 Firm Costs: Tax vs. Standard Under an emissions tax, a rms total compliance costs are de ned as total compliance costs = total abatement costs + tax paid All other things being equal, a pro t-maximizing rm would like to minimize it total compliance costs $/unit E E U MAC emissions t A regulator can get the rm to reduce emissions to E by either imposing an emissions standard of E levying an emission tax of $ t In both cases the rm will produce the same amount of emission and therefore the total damage caused by the emissions will be the same But what about the rm's compliance costs? under the standard, the rm's compliance costs are just its total abatement costs, area A under the tax, the rm's compliance costs consist of its total abatement costs (area A ) plus the taxes paid (area B ) BASD 505 Lecture 6: page 3 s CONCLUSION: All other things being equal, a rm's total compliance costs are lower under the standard than under an equivalent emissions tax Although the taxes paid, B , are a cost to the rm, they do not represent a cost from society's perspective. Why? Because the tax is just a transfer from one segment of society (ie, the rm) to another segment of society (ie, the regulator or government) s QUICK QUIZ: How could the regulator reduce rm's tax burden, while still inducing the rm to emit at the desired level? $/unit E U MAC emissions t As shown above, the regulator could levy tax t only on emissions in excess of some threshold E BASD 505 Lecture 6: page 4 Asymmetric information Earlier we concluded that under an emissions standard, rms have an incentive to mislead regulators by exaggerating abatement costs But does a rm still have an incentive to misrepresent its abatement costs it faces...
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BASD505 Course Notes 6 - Emission Taxes Consider a single...

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