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Unformatted text preview: 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 fir m 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 abat ement costs for old fir m I ncrease in abat ement costs for new fir m E* When fir m lies, its TAC is less (B) vs. Telling the tr uth (A+B) At E’ tot al damage from pollution exceeds t otal cost of abatement or MD>MAC therefore room t o Repor t ed MAC $/unit MD (known) Tr ue MAC E* E’ B A Repor t ed MD MAC (known) Victims repor t higher MD so regulat or would set more str ingent standards thus incur r ing larger abat ement c $/unit E’ E* Tr ue MD C A B regulat or can continually adjust E* to satisfy socially efficient production aft er a company innovates or set it initially and M yopic Regulator : if regulat or sets and leave it, the savings t o fir m is (A) (however creat es DWL if it is not adjust ed) Dynamic efficiency Active Regulator : if regular adjusts t o E* when there is innovation then savings is A-C, therefore, savings is dilut ed and Static efficiency MAC before $/unit MD MAC Aft er E* E’ B A C I ncrease incentive t o innovat e by setting overly str ingent emission st andards therefore creating great er potential saving Creat e DWL of C when set at E* until fir m innovat es Financial incentive t o innovat e is A+B+C therefore creating bigger incentive t o innovat e Problem: if t oo str ingent and fir m does not innovate then continue t o have DWL while posing high costs t o fir ms MAC before $/unit MD MAC Aft er 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 fir ms cannot produce more than set an iso-pollution line that fir ms can choose to produce anywhere a max profits as a function of abat ement effor ts (a) and production (y) Abat ement effor t E* E’ Output Y0 Y1 A1 A0 line as Y* is the desired max profit level of production, the far ther 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 abat ement cost where on the iso-pollution line t o produce and how t o abate t o reach that level therefore produce at point D, which is closer to Y*, thus I so-profit lines D C B A Output Abat ement effor t A1 A2 π 3 π 2 π 1 Y1 Y* E3 E2 E1 $/unit or t o tax, fir m will decrease emissions and abat e to E o where T=MAC egulat or increase tax from T o to T’ then fimr will abate t o E’ gulator must know fir m’s MAC to det er mine tax rat e 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 Tr ue MAC Repor t ed MAC $/unit I f fir ms t ell tr uth, regulator sets tax t=t...
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This note was uploaded on 04/21/2010 for the course BUSINESS basd505 taught by Professor Clive during the Spring '10 term at UBC.
- Spring '10
- Environmental Economics