Question

Using Figure 11-5 and the equations underlying it, show the impact of a technology-forcing standard on a polluter’s incentive to invest in R&D to reduce compliance costs.

EXAMPLE Incentives to invest in new technologies under emission standards Figure 11-5 shows marginal abatement costs of a firm in two situations. MAC1 refers to such costs before a given technological improvement. MAC2 is the marginal abatement cost curve the firm could expect to have after investing resources in R&D to develop better treatment or recycling technology. To be concrete, let MAC1 = = 200 – 5E MAC2 = 160 – 4E MD = 5E FIGURE 11-5 Incentives to Invest in New Pollution-Control Technology under a Standard $(thousands) 200 MAC 160 MD MAC 100 je b 1 - 10 30 17.78 20 11 11 E E 40 11 E Emissions (tonnes per year)

Answer 1

As you can clearly see from the graph that after a technology forcing standard, the firm has taken strides in its R&D by reducing marginal abatement costs by a significant amount. This means that the cost associated with reducing one unit of pollutant has decreased than it was before the technological improvement. As a result of this, the emissions have decreased by 2.2 tonnes to 17.78 tonnes, thereby achieving socially optimal point. The polluter's incentive to invest in R&D is nothing but the decreased Marginal Abatement Costs associated. And this benefits socially as well by virtue of the reduced emissions.

Hope this helps. Do hit the thumbs up. Cheers!