Deck 12: Incentive-Based Strategies: Emission Charges and Subsidies

Question 1

If the regulatory authority charged an emission tax of $20 per unit of emissions what is the level of emissions and the total abatement cost of each source? Is the tax cost effective?

Answer 1

Each source will emit where MAC = tax so:
MAC_A = 200 - 4E_A = 20
E_A = 180/4 = 45
MAC_B = 250 - 5E_B = 20
E_B = 230/5 = 46
MAC_C = 100 - 2E_C = 20
E_C = 80/2 = 40
Total abatement cost for each source is equal to the area under the MAC curve:
TAC_A = ½(5 * 20)= $50
TAC_B = ½(4 * 20)= $40
TAC_C = ½(10 * 20)= $100
We can see that the lower the costs of the source,the more abatement that source undertakes when the tax is in place.Furthermore,the tax is cost effective because the MAC of each source is equal to $20 so the equimarginal principle is satisfied.

Question 2

For an industry with MAC = 480 - 2E and MDC = 4E,the socially efficient tax is equal to ________.

A)$160
B)$320
C)$240
D)$80

Answer 2

B

Question 3

A firm with MAC = 500 - 2.5E will abate ________ units if paid an abatement subsidy of $120 per unit abated.

A)248
B)200
C)152
D)48

Answer 3

D

Question 4

A polluter with MAC = 600 - 5E will emit ________ when faced with an emissions tax of $200 per unit of emissions.

A)400 units
B)160 units
C)80 units
D)40 units

Question 5

Emission taxes are always socially efficient because they satisfy the equimarginal principle.
Emission taxes are always cost effective because they satisfy the equimarginal principle.They are only socially efficient if they result in the socially efficient level of emissions.

Question 6

If the regulatory authority charged an emission tax of $40 per unit of emissions what is the level of emissions and the total abatement cost of each source? Is the tax cost effective?

Question 7

For an industry with MAC = 400 - 4E and MDC = 4E,calculate the socially efficient tax rate.What are the net social benefits of the socially efficient tax?

Question 8

For an industry with MAC = 500 - 2E and MDC = 3E,calculate the socially efficient tax rate.What is the total compliance cost to the industry if the socially efficient tax is charged?

Question 9

A firm with MAC = 200 - 4E will abate ________ units if paid an abatement subsidy of $30 per unit abated.

A)7.5
B)20
C)42.5
D)80

Question 10

If the regulatory authority charged an emission tax of $30 per unit of emissions what is the level of emissions and the total abatement cost of each source? Is the tax cost effective?

Question 11

The incentive to innovate induced by pollution policies is referred to as ________.

A)Coase's theorem
B)the opportunity cost doctrine
C)the Porter hypothesis
D)the double dividend

Question 12

A polluter with MAC = 400 - 4E will emit ________ when faced with an emissions tax of $70 per unit of emissions.

A)17.5 units
B)82.5 units
C)117.5 units
D)120 units

Question 13

Taxes are transfer payments - payments made by the polluters to the public sector and eventually to those in society who are benefited by the resulting public expenditures - and are therefore not a social cost of the policy.

Question 14

For an industry with MAC = 540 - 2E and MDC = 8E,the socially efficient tax is equal to ________.

A)$54
B)$90
C)$432
D)$720

Question 15

Suppose a polluting firm has MAC = 400 - ½ E.Calculate the firm's level of emissions,abatement and total compliance cost if it faced an effluent fee of $120 per unit of emissions.
The firm will emit where MAC = tax:
400 - ½ E = 120
E = 2 * (400 - 120)= 560
Abatement will equal the unregulated level of emissions minus emissions of 560.Unregulated emissions are found where MAC = 0:
400 - ½ E₀ = 0
E₀ = 800
So abatement equals 240 units.The total compliance cost of the firm will equal the sum of its total abatement cost and the emission taxes it pays.Total abatement cost is the area under the MAC curve from emissions of 560 to emissions of 800:
TAC = ½(240 * 120)= $14,400
Total taxes paid will equal the level of emissions times the tax of $120 per unit of emissions:
Taxes paid = 120 * 560 = $67,200
Total compliance cost of the firm is therefore $81,600.

Question 16

When MACs differ among polluters,________ are lower under a tax than a uniform standard meeting the same target level of emissions.

A)private compliance costs
B)marginal abatement costs
C)total costs of the firms
D)social compliance costs

Question 17

Which of the following statements about abatement subsidies is NOT true?

A)Environmental groups dislike abatement subsidies because they appear to reward polluters.
B)Governments like abatement subsidies because they are relatively inexpensive to implement.
C)Abatement subsidies are popular with firms.
D)Abatement subsidies create perverse incentives for firms to increase emissions when their base levels are being set.

Question 18

If the regulatory authority charged an emission tax of $50 per unit of emissions what is the level of emissions and the total abatement cost of each source? Is the tax cost effective?

Question 19

Emission taxes provide less incentive for firms to conduct R&D to find cheaper ways to reduce emissions than standards.

Question 20

Suppose a polluting firm has MAC = 500 -E.Calculate the firm's level of emissions,abatement and total compliance cost if it faced an effluent fee of $200 per unit of emissions.
The firm will emit where MAC = tax:
500 - E = 200
E = 300
Abatement will equal the unregulated level of emissions minus emissions of 300.Unregulated emissions are found where MAC = 0:
500 - E₀ = 0
E₀ = 500
So abatement equals 200 units.The total compliance cost of the firm will equal the sum of its total abatement cost and the emission taxes it pays.Total abatement cost is the area under the MAC curve from emissions of 300 to emissions of 500:
TAC = ½(200 * 200)= $20,000
Total taxes paid will equal the level of emissions times the tax of $200 per unit of emissions:
Taxes paid = 200 * 300 = $60,000
Total compliance cost of the firm is therefore $80,000.

Question 21

If a firm has MAC = 320 - 4E compare the level of abatement achieved as well as the costs to the firm and the government of an emission tax of $80 versus an abatement subsidy of $80.

Question 22

If the regulatory authority imposed a uniform standard of 80 units of emissions for each source what is the total abatement cost of each source? Is the uniform standard cost effective?

Question 23

Briefly define and explain what is meant by the double dividend of emissions taxes.

Question 24

If the firm faced an emission tax of $80 per unit of emissions,what is the maximum amount of money it would be willing to spend on R&D to achieve the lower MAC? How does this amount compare to what the firm would be willing to spend under a standard of 40 units?

Question 25

Compare the total social costs by source and for the entire industry of a $90 emission tax versus a uniform standard that achieves the same level of industry abatement as the tax.

Question 26

Briefly discuss the two key differences between incentives to innovate under taxes versus standards.