Questions:
1. You have the following information on the marginal benefit and marginal cost of abating emissions of a given pollutant.
Marginal benefit of abating emissions, f (A) =1000-A
Marginal cost of abating emissions, g (A) =400+9A
a) Assume that there is no policy in place to reduce emissions (and therefore A=0). Represent graphically and calculate the deadweight loss of the outcome.
b) Now assume that the policy in place to reduce emission induces A=50. Represent graphically and calculate the deadweight loss of the outcome.
c) What is the socially efficient level of abatement?
d) Assume that the policy maker wants to achieve the socially efficient level of abatement by setting a standard (command and control). What is the deadweight loss associated with this policy? Explain
e) Now assume that the policy maker wants to achieve the socially efficient level of abatement by setting a tax per unit of emission (i.e. a carbon tax). What is the level of the tax that should be introduced? What is the deadweight loss associated with this policy? Explain
Now assume that the policy maker does not know for sure the marginal cost of abatement. Before choosing the policy, the best estimate of the marginal cost of abatement is g(A)=400+9A. However, after the policy has been implemented, the true marginal cost of abatement turns out to be h(A)=400+11A.
f) Assume that the policy maker has set a standard like in point 1d(that is thinking that the marginal cost of abatement is g(A)=400+9A).
i. What is the socially efficient level of abatement if the marginal cost of abatement turns out to be h (A) =400+11A.
ii. Is the level of abatement set by the policy maker lower or higher than the socially efficient level of abatement? Explain.
iii. What is the deadweight loss of this policy if the marginal cost of abatement turns out to be h (A) =400+11A (don't calculate it, on graphically)?
g) Now assume that the policy maker has set a carbon tax like in point 1e(that is thinking that the marginal cost of abatement is g(a)=400+9a).
i. If the marginal cost of abatement turns out to be h(A)=400+11A, what is the level of abatement that the policy induces?
ii. Is this level of abatement lower or higher than the socially efficient level of abatement? Explain
iii. What is the deadweight loss of this policy if the marginal cost of abatement turns out to be h(A)=400+11A(don't calculate it, only graphically)?