AEM 250 Lec24 Cost Effective Taxes 102210 sv

# AEM 250 Lec24 Cost - Distortive and Pollution(Corrective Taxes Distortive Tax a tax that drives a wedge between price and marginal private cost(MPC

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Distortive and Pollution (Corrective) Taxes • Distortive Tax : a tax that drives a wedge between price and marginal private cost (MPC) of production. This distortion duces inefficiency by causing deadweight loss induces inefficiency by causing deadweight loss. • Externality : Uncompensated marginal external costs (MEC) create a market failure by causing a deviation between MPC and marginal social costs (MSC),creating an ineffiency. Pollution tax : a per unit tax based on the level of pollution. – Polluter pays principle. – If it is a per unit tax set equal to the Marginal external social costs at the social optimum, it is a Pigouvian Tax. Note: As presented thus far, the pollution tax has been on output nly assuming a one ne ratio between output and pollution only, assuming a one-to-one ratio between output and pollution. We now turn to a more general tax on pollution.

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A 1 C(A 1 ) = A 1 2 A 2 C(A 2 ) = 2*A 2 2 C(A 1 )+C(A 2 ) 62 62 Minimize C(A ) + C(A ) ; 0 0 9 162 162 11 8 128 129 24 79 8 102 39 67 2 81 1 2 subject to A 1 + A 2 = A* Minimize A 1 2 + 2*A 2 2 ; subject to A 1 + A 2 = 9 41 6 55 0 66 52 5 43 2 57 63 6 31 8 54 7 49 2 8 57 86 4 12 66 98 1 00 81 0 1 2 3 4 5 6 7 8 9 <== A 2 120 140 160 180 120 140 160 180 C(A1)+C(A2) Brute Force: Check All 40 60 80 100 40 60 80 100 Possible Combinations of Abatement that Sum to 9. 0 20 0 20 0123456789 A 1 ==>
But What if More Than Integer Solutions? Minimize C(A ) + C(A ) ; Minimize A 2 + 2*A 2 ; The Solution to ( 1 ) ( 2 ) ; subject to A 1 + A 2 = A* 1 2 ; subject to A 1 + A 2 = 9 Is Equivalent to q MAC(A 1 ) = MAC(A 2 ) ; ubject to + = A* 2A 1 = 4A 2 ; ubject to + = subject to 1 2 subject to 1 2 9

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## This note was uploaded on 12/20/2010 for the course AEM 25 taught by Professor Poe during the Fall '10 term at Cornell University (Engineering School).

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AEM 250 Lec24 Cost - Distortive and Pollution(Corrective Taxes Distortive Tax a tax that drives a wedge between price and marginal private cost(MPC

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