Question 1

Compare the total social costs and total private compliance costs by source and for the entire industry of a transferable emission permit scheme versus a uniform standard that achieve industry emissions of 800 units.Assume each source is given one-half of the permits initially.

Accepted Answer

Under the TEP scheme the total number of permits will equal 800.We can solve for the price of permits by using the following two conditions: E_A + E_B = 800 MAC_A = MAC_B The first condition states that the emissions of each firm will add to the total emissions of the industry.Rearranging this equation yields the relationship:E_A = 800 - E_B.If we substitute this into the second condition (the equimarginal condition),we can solve for E_B. 2,000 - 4(800 - E_B)= 1,800 - E_B 3,000 = 5E_B E_B = 600 Once we know E_B,we can solve for E_A = 800 - 600 = 200.The permits will trade at the price that equals MAC under the permit: MAC_A = 2,000 - 4(200)= $1,200 MAC_B = 1,800 - 600 = $1,200 A uniform standard that would achieve the same level of emissions would be 400 units of emissions for each source.The MAC of each source would then be equal to: MAC_A = 2,000 - 4(400)= 400 MAC_B = 1,800 - 400 = 1,400 The following table summarizes the emissions,abatement,total abatement cost and total compliance cost of the tax versus the uniform standard. $$\begin{array} { | l | r | r | r | r | r | r | r | r | } \hline & { \text { Transferable Emission Permits } } &&&&&&& { \text { Uniform Standard } } \ \hline & \text { A } & \text { E } & { \text { TAC } } & \begin{array} { c } \text { Permit } \ \text { Sales } \end{array} & \text { TCC } & \text { A } & \text { E } & \text { TAC = TCC } \ \hline \text { A } & 300 & 200 & 1,4 ( 300 \times 1,200 ) = & 240,000 & 420,000 & 100 & 400 & 1 / 2 ( 100 \times 400 ) = 20,000 \ & & & 180,000 & & & & & \ \hline \text { B } & 1,200 & 600 & 1 , ( 1,200 \times 1,200 ) = & ( 240,000 ) & 480,000 & 1,400 & 400 & 1,2 ( 1,400 \times 1,400 ) = \ & & & 720,000 & & & & & 980,000 \ \hline \text { Industry } & 1,500 & 800 & 900,000 & 0 & 900,000 & 1,500 & 800 & 1,000,000 \ \hline \end{array}$$ The TEP scheme results in lower social compliance cost for the industry as a whole than the uniform standard because it is cost effective.Results by firm vary since the permits result in the lower cost firm abating more than the higher cost firm.The total private compliance cost (TCC)of the TEP scheme is lower than the uniform standard since although it includes any permit acquisition costs,the permits were given away so the net effect is zero and TAC = TCC for the industry.

Question 2

When there is uncertainty about the marginal abatement cost curve,the steeper the marginal damage cost curve,the closer a standard or transferable emissions program will be to the socially efficient equilibrium than a tax.

Accepted Answer

This statement is true. When there is uncertainty about the shape and position of the marginal abatement cost curve, a standard or transferable emissions program has an advantage over a tax if the marginal damage cost curve is steeper, as the program can offer flexibility for firms to determine their own abatement costs. The steeper marginal damage cost curve means that there is a higher social cost for each unit of emissions, making it more important to reach the socially efficient equilibrium.

Question 3

Under a transferable emission permit scheme,a polluter has an incentive to reveal an excessively high MAC relative to its true MAC.

Accepted Answer

Under a transferable emission permit scheme, a polluter has an incentive to understate its Marginal Abatement Costs (MAC) to receive more permits or to buy fewer permits from the market, not to overstate them. Revealing a higher MAC than the true MAC would make it seem more costly for the firm to reduce emissions, which does not provide a direct benefit under such a scheme.

Question 4

Individual standards have the same informational requirements as uniform standards.
Individual standards require knowledge of each firm's marginal abatement cost functions as well as the marginal damage cost.

Accepted Answer

Uniform standards set a single standard for all, not requiring detailed knowledge of each firm's costs, whereas individual standards necessitate specific information about each firm's marginal abatement costs and the marginal damage costs to tailor the standards appropriately.

Question 5

Compare the total social costs and total private compliance costs by source and for the entire industry of a $72 emission tax versus a uniform standard that achieves the same level of industry abatement as the tax.

Accepted Answer

The answer of Compare the total social costs and total...

Question 6

Under a tax,a polluter has no incentive to reveal an excessively high MAC relative to its true MAC.

Accepted Answer

Revealing an excessively high Marginal Abatement Cost (MAC) would not benefit the polluter under a tax system because the tax is based on emissions, not on reported costs. Revealing higher costs does not reduce the tax burden; reducing emissions does.

Question 7

Whether a polluter reveals its true MAC under a tax depends on the tax rate set by the regulator and the polluter's true MAC.

Accepted Answer

The tax rate set by the regulator and the polluter's true MAC both play a role in whether a polluter reveals its true MAC under a tax. If the tax rate is too low, it may be more profitable for the polluter to continue polluting at a higher rate rather than revealing its true MAC and reducing emissions. However, if the tax rate is set high enough, it may incentivize the polluter to reveal its true MAC in order to avoid paying higher taxes. Additionally, the polluter's true MAC will impact how much it can afford to pay in taxes while still remaining profitable.

Question 8

When there is uncertainty about the marginal abatement cost curve,the flatter the marginal damage cost curve,the closer a standard or transferable emissions program will be to the socially efficient equilibrium than a tax.

Accepted Answer

When there is uncertainty about the marginal abatement cost curve, a tax is generally closer to the socially efficient equilibrium than a standard or transferable emissions program, regardless of the shape of the marginal damage cost curve. This is because a tax directly targets the cost of emissions, making it more adaptable to changes in abatement costs.

Question 9

An emission tax scheme will always have a higher private compliance cost than a transferable emission permit scheme that achieves the same level of abatement.
If the permits are initially allocated by auction,the private compliance cost of the TEP scheme will be identical to the private compliance cost of the tax.

Accepted Answer

The private compliance cost under a transferable emission permit (TEP) scheme can vary depending on how the permits are allocated and traded. If permits are initially allocated for free, firms may have lower compliance costs compared to an emission tax scheme. However, if permits are auctioned, the initial purchase cost for firms would be similar to the tax they would pay under an emission tax scheme, making the private compliance costs potentially similar at the outset. The difference in compliance costs over time would then depend on the market for permits and the flexibility it provides for firms to reduce emissions in a cost-effective manner.

Question 10

Under a standard,the polluter has an incentive to reveal a MAC that is lower than its true MAC.

Accepted Answer

Under a standard, a polluter might have an incentive to overstate its Marginal Abatement Cost (MAC) to avoid stringent regulations, as revealing a lower MAC might lead to the imposition of stricter abatement requirements.

Question 11

When there is uncertainty about the marginal abatement cost curve and the marginal damage cost curve is ________,a transferable emission permit or a standard equal to the ________ is the socially efficient policy.

Accepted Answer

When the marginal damage cost curve is vertical, it indicates that the damage cost of pollution is constant regardless of the level of emissions. In such a scenario, setting a standard equal to the socially efficient level of emissions ensures that the total amount of emissions does not exceed the level where the marginal abatement cost equals the marginal damage cost, achieving social efficiency despite uncertainty in the marginal abatement cost curve.

Question 12

When there is uncertainty about the marginal abatement cost curve andthe marginal damage cost curve is ________,a tax equal to the ________ is the socially efficient policy.

Accepted Answer

When the marginal damage cost curve is horizontal, it indicates that the marginal damage of pollution is constant regardless of the level of emissions. In this scenario, a tax equal to the marginal damages ensures that the cost of emissions to society is covered, making it the socially efficient policy.

Quiz 14: Federal Water Pollution - Control Policy