Unformatted text preview: Principles of Economics I
Economics 101 Announcements Readings: Chapter 5 this week Discussion Sections this week New assignment available on Ctools Exam 2 Tuesday, March 24th Practice Exam available this evening No class Monday 23rd Cap-and-trade schemes
MAC1 MAC2 = 2Q2 MAC1 = Q1 MAC2 600 400 400 300 Q1: 0 600 300 300 400 200 600 0 :Q2 Alternatives to private solutions: The pollution example Regulation of pollution by command Legislate technology to be used Legislate caps on output of products No way to ensure that the "cheap" method of abatement is used Alternatives to private solutions: The pollution example Taxation of polluting firms We want to "internalize" the external costs of pollution Impose a tax equal to the marginal damage from pollution Parties to the transaction observe both production costs AND taxation costs Equal to the production cost PLUS MARGINAL DAMAGE Pigouvian Tax
$/unit MCsoc MCproduction MCsoc = MVsoc Pc t* P* Pp MVsoc Qeff Q* Q Pigouvian Subsidy
$/unit MC MC = MVsoc Pp s* P* Pc MVsoc MVprivate Q* Qeff Q Pigouvian Taxation vs. Coasian Solutions Pigouvian taxation: Coasian Solutions: Need to know information about private costs and benefits If we cannot measure pollution directly, can only manipulate output of the good (not necessarily the low cost approach to abatement) No need to know information about private costs and benefits Potentially provides incentives on all relevant margins Requires well defined and enforcable property rights Requires bargaining and transactions costs are low ...
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