A firm will avoid producing additional emissions whenever the fee is:
A) less than the MSB.
B) greater than the MSB.
C) less than the MCA.
D) greater than the MCA.
E) equal to the distance between MSB and MCA.

Question

Quizplus · Accepted Answer

The marginal cost of abatement (MCA) is the cost to a firm of reducing one unit of emissions, while the marginal social benefit (MSB) reflects the value to society of reducing one unit of emissions. When the fee charged to the firm for emitting pollutants is greater than the MCA, the firm will have an incentive to reduce emissions up to the point where the fee equals the MCA. At this point, the cost of reducing an additional unit of emissions is higher than the benefit gained from reducing it, so the firm will not produce additional emissions. Therefore, D is the correct answer.

A Firm Will Avoid Producing Additional Emissions Whenever the Fee