Question

If regulators are considering an emissions tax, they will be more uncertain about the resulting level of emissions if ______________________ (hint: draw the market)

Select one:

a. firms in the industry experience a steep abatement cost curve

b. firms in the industry experience a flat abatement cost curve

c. the firms are located in a rural area

d. the firms are located in an urban area

Answer 1

The abatement cost increases with an increase in emission, that is, upward sloping curve. The slope of the abatement cost curve is the rate at which the cost of abatement changes due to changes in emissions.

Therefore, the industry experiencing steeper abatement cost curve means the small rate of change in the cost of abatement due to a change in emission. As the emission tax will increase the cost to firms. But in the case of steeper cost curve there is very little change in the cost of abatement as steeper the abatement cost curve and thus, impact on emission is uncertain as that depends on the steepness of abatement cost curve. The diagram shows both the steeper abatement cost curves -

Therefore, Option (B) is correct and the rest all are incorrect.