Question

1. The following figure shows the marginal abatement cost curve of a polluting firm. The status quo level of SO2 emissions of the firm is 100 tons. Suppose the government is targeting 50 tons of emissions from this firm. The government can achieve this target by setting emission standard of 50 tons or by imposing an emission tax t per ton of emission. The authority allows the source to choose between the standard and the tax t. Would the firm choose the emission standard or the emission tax? Using the graph below to explain your reasoning. In your explanation, you should show the cost for this firm resulting from using standard and tax respectively (using the area symbol in the graph to express the cost). (20 pts) $ MAC t a b 50 100 9 (here q is the abatement level)

Answer 1

The firm will prefer the emission standard

Bcoz in case of emission standard set at 50 units, then pollution abatement needed = 50 units

q= 50

Then total abatement cost TAC = area under MAC from q= 0 to q= 50

TAC = b

............

with tax system t, the equilibrium occurs, where t = MAC

q*= 50

Total abatement 50 units

Total cost incurred = tax payment + abatement cost

= b+c

So total cost is higher with tax system