Government regulators want to limit pesticide runoff to its efficient level. Unfortunately, government regulators are uncertain how marginal abatement costs behave with changes in runoff, but fortunately, they do know that marginal abatement costs are less sensitive to changes in runoff than marginal costs of pollution. In this situation, the use of a _____ leads to a smaller deadweight loss than a _____.

Question

Quizplus · Accepted Answer

Since government regulators are uncertain about how marginal abatement costs behave with changes in runoff, a Pigouvian tax may result in a large deadweight loss due to uncertainty. A quota, on the other hand, would provide a clear limit on the amount of pesticide runoff allowed and would likely result in less uncertainty and a smaller deadweight loss. However, a quantity restriction may not be as effective in achieving the optimal level of pesticide runoff as a Pigouvian tax. Therefore, the best option in this situation would be a Pigouvian tax with a smaller deadweight loss due to the fact that marginal abatement costs are less sensitive to changes in runoff than marginal costs of pollution.

Government Regulators Want to Limit Pesticide Runoff to Its Efficient