BASD505 Course Review - BASD505 E o fir m r eact s E abat...

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SMC= PMC+MEC $/Unit Assimilative capacity of environment Demand= MWTP= PMB Q* Q m P m P* Supply= PMC MEC Q $/unit MD 1 MD 2 0 5 10 15 20 25 emissions (kg/hr) $10 $15 TD 2 Assimilative capacity of environment for MD 2 E (0) Extra cost to firm for using tech standard E (u) MAC (t) MAC (u) E $/unit $/unit 100 80 60 40 20 TAC= 320 TAC= 160 TAC= 160 2 6 2 7 15 Emissions MD E (u) E (t) E* $/unit MAC (agg) D A B C $/unit MAC (old) MAC (new) Decrease in abatement costs for old firm Increase in abatement costs for new firm E* When firm lies, its TAC is less (B) vs. Telling the truth (A+B) At E’ total damage from pollution exceeds total cost of abatement or MD>MAC therefore room to Reported MAC $/unit MD (known) True MAC E* E’ B A Reported MD MAC (known) Victims report higher MD so regulator would set more stringent standards thus incurring larger abatement c $/unit E’ E* True MD C A B regulator can continually adjust E* to satisfy socially efficient production after a company innovates or set it initially and Myopic Regulator : if regulator sets and leave it, the savings to firm is (A) (however creates DWL if it is not adjusted) Dynamic efficiency Active Regulator : if regular adjusts to E* when there is innovation then savings is A-C, therefore, savings is diluted and Static efficiency MAC before $/unit MD MAC After E* E’ B A C Increase incentive to innovate by setting overly stringent emission standards therefore creating greater potential saving Create DWL of C when set at E* until firm innovates Financial incentive to innovate is A+B+C therefore creating bigger incentive to innovate Problem: if too stringent and firm does not innovate then continue to have DWL while posing high costs to firms MAC before $/unit MD MAC After B C A E D E* E’ l of pollution along iso-pollution line es means higher emissions (e* e’) s set an emission level which firms cannot produce more than set an iso-pollution line that firms can choose to produce anywhere a max profits as a function of abatement efforts (a) and production (y) Abatement effort E* E’ Output Y0 Y1 A1 A0 line as Y* is the desired max profit level of production, the farther it is away from Y*, the lower the profit ts, and lateral shifts change production to sub-optimal levels and reach max profit produce at point C as they cannot decide the abatement cost where on the iso-pollution line to produce and how to abate to reach that level therefore produce at point D, which is closer to Y*, thus Iso-profit lines D C B A Output Abatement effort A1 A2 π 3 π 2 π 1 Y1 Y* E3 E2 E1 $/unit or to tax, firm will decrease emissions and abate to E o where T=MAC egulator increase tax from T o to T’ then fimr will abate to E’ gulator must know firm’s MAC to determine tax rate al compliance cost (TCC)= TAC+ Taxes C= A+B+C and Taxes= D+E MAC E D C A T > MAC T > MAC E o E’ T o T B True MAC Reported MAC $/unit If firms tell truth, regulator sets tax t=t o , firm reacts by abating to E o and target of E o is hit TCC= TAC+Taxes= (A+B+C+D)+(E+F+G) If firm under-reports MAC, regulator sets tax rate t=t’ allowing firm to emit at E’
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