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Econ 131 lecture 8

Econ 131 lecture 8 - Quizzes Graded for Thursday We will...

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Quizzes Graded for Thursday We will post the scores and curve on Ted and return the graded quizzes at the end of class Thursday Problem set 3 (due 10/24) is on Ted Review: Policy Equivalence In the absence of uncertainty, the efficient outcome can be reached either with a tax or with tradable permits Furthermore, the price of the tradable permits will exactly equal the tax rate at the efficient point
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Permits and Firms’ Behavior Imagine the MC of abatement curve represents costs faced by a firm (for example if demand is perfectly elastic) Common simplifying assumption we’ll use for the next few examples Allows us to consider ways to reduce pollution other than changes in Q and the associated surplus losses Permits and Firms’ Behavior MC(X) = 3X Xmax = 10 Show graphically why a firm finds it cheapest to respond to a tax of 9 by choosing X such that MC(X) = tax Now assume the firm is given 9 permits that it can sell for 9 dollars each if it chooses to. Does the firm want to sell any? How much abatement does it do?
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Prices vs. Quantities (In policy terms, taxes vs. cap-and-trade ) The two types of policy are equivalent if marginal costs are known If marginal costs are unexpectedly high or low, either policy may miss the optimal point Title IV of the CAAA of 1990 They printed about 8 million permits valid for 1995, then fewer each year until the current
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