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.

Question

Quizplus · Accepted Answer

The Answer is 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 & { ext { Transferable Emission Permits } } &&&&&&& { ext { Uniform Standard } } \\hline & ext { A } & ext { E } & { ext { TAC } } & \begin{array} { c } ext { Permit } \ ext { Sales }\end{array} & ext { TCC } & ext { A } & ext { E } & ext { TAC = TCC } \\hline ext { A } & 300 & 200 & 1,4 ( 300 imes 1,200 ) = & 240,000 & 420,000 & 100 & 400 & 1 / 2 ( 100 imes 400 ) = 20,000 \& & & 180,000 & & & & & \\hline ext { B } & 1,200 & 600 & 1 , ( 1,200 imes 1,200 ) = & ( 240,000 ) & 480,000 & 1,400 & 400 & 1,2 ( 1,400 imes 1,400 ) = \& & & 720,000 & & & & & 980,000 \\hline ext { 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.

Compare the Total Social Costs and Total Private Compliance Costs