When the aggregate marginal savings function is uncertain and the marginal damage curve is relatively flat, is it optimal to use an emission limit system (cap and trade) or to tax emissions to regulate pollution?

When the aggregate marginal savings function is uncertain and the marginal damage curve is relatively flat, is it optimal to use an emission limit system (cap and trade) or to tax emissions to regulate pollution?

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter17: Market Failure: Externalities, Public Goods, And Asymmetric Information

Section: Chapter Questions

Problem 14QP

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When the aggregate marginal savings function is uncertain and the marginal damage
curve is relatively flat, is it optimal to use an emission limit system (cap and trade) or to
tax emissions to regulate pollution?

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No hand written solution Afirm has an industrial plant that emits pollutants into a town’s lake. The plant’s marginal abatement function is MAC= 200 – 0.5E and damages caused by its emissions are given by MD = 2E where emissions are in kg. per day. What is the socially efficient level of emissions from this plant? Illustrate this in a graph. As an incentive to reduce emissions to the socially efficient level, government offers to pay the firm for each kg. of emissions it abates per day from this plant. What subsidy per kg. should the government offer? If the plant abates to the socially efficient level of emissions, what total subsidy payment would the firm receive? Identify the area in your graph. How much better or worse off would the firm be compared to if it did no abating? Identify the area in your graph. What would be the net benefit to society if we pay the firm to reduce the plant’s emissions to the socially efficient level? Identify this area in your graph.
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