7 - We began class concluding the e-mail discussion on the...

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We began class concluding the e-mail discussion on the disadvantages of emission fees. Issues raised included: o Uncertainty Compared to command and control, emission fees provide more certainty on costs, but less certainty on the final level of emissions. o Geographically-varying damage Market-based policies guarantee an overall goal, but they don't guarantee which firms will reduce and which firms won't. If firms near an urban center choose to pay the fee rather than reduce emissions, damages may remain high. Varying the fee based on potential damages can help address this. o Distributional issues Concerns about equity might make some environmental taxes politically unpopular. For example, lower income families spend more of their income on gasoline, making a gas tax a regressive. While all policies raise the possibility of costs being passed on to consumers, there are more costs to be passed on here, as firms pay both for abatement and the fee for the remaining units of pollution. o Monitoring costs To charge a fee per unit of pollution, all pollution must be monitored and measured. o Flexibility Compared to regulations that mandate a specific abatement technique, fees are more flexible In addition, if economic conditions change, fees allow responses to adjust to new conditions. I. Implementation Issues We began class by discussing practical issues for implementing an environmental tax. o Note that most U.S. taxes that affect the environment were not implemented primarily for environmental reasons. Other concerns, such as raising revenue, tend to be more important. Questions for designing an environmental excise tax: o What is to be taxed? That is, what is the tax base. May be direct (e.g. CFCs, emissions), or indirect (e.g. gasoline) o Who is to be taxed? Here we’re focusing on administration, not ultimate incidence. Recall that economic incidence is independent of legal incidence. Ideally, we would like to tax users directly. However, it can be difficult to know the users. For example, to prevent non-point pollution, we may tax fertilizer, since we can’t tax each farmer for his or her individual contribution.
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Also, there may be many users. For CFCs, it was easier to tax production than tax each user. o What tax rate to impose? This is where most of the economic analysis comes in. Problems: Knowing MD is difficult. Therefore it is hard to set the tax correctly. Uncertainty could be bad if mistakes costly. As we'll see in a couple of weeks, in these cases (e.g. threshold effects), regulation may be better. Although we also might not know about MAC, taxes may help us learn about the MAC of firms. They will choose to pay the tax when tax < MAC.
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7 - We began class concluding the e-mail discussion on the...

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