Environmental Economics Midterm 2

total abatement cost

cost for a given reduction in pollution

Goals for policy

allocative efficiency and cost effectiveness

Direct expenditures

end of pipe/process abatement, removing pollution out of final product, ex. SO2 scrubbers

productivity losses

source reduction, change technology to produce less pollution in the first place

other social welfare costs

consumer and producer surplus from reduced output

why are there some negative costs for abatement

market failures, lack of information, underestimation of costs of some approaches

MAC curve slope is

positive and increasing

command and control regulation

relies mostly on standards

technology standard

what abatement technology the polluter must use

performance standard

The government gives a measure of how much the polluter should reduce pollution

Which command and control standard is more cost effective

performance standard, installing new tech can be very expensive

what is the general cost-effective level of abatement

minimize the sum of all firms’ TAC subject to a1 + a2 = A, or MAC1 = MAC2

cost-efficiency is reached in command and control when

all MACs are equal

what are barriers to equalizing MACs for all firms

complexity, information asymmetry, political feasibility

incentive based policy

motivates the firm to pollute less

what is general cost effectiveness for a pollution tax

minimize TAC + taxes paid for remaining pollution

what abatement level do polluters chose with a pollution tax

where MAC = Tax

what are issues with pollution subsidies

establishing uncontrolled pollution level, firm shut down decisions (may keep polluters in business)

allocative efficient tax / Pigouvian tax

tax = marginal environmental damage

what are possible uses of tax revenue

compensate victims, linked environmental projects, revenue recycling

emission trading system

The government creates permits/property rights to emit units of pollution, permits can be bought and sold in a market

what is the cost effective equilibrium for emission trading

permit price at the point where all MACs are equal

how should permits be allocated

The initial allocation is irrelevant if market is fell functioning

Firms with high MACs will

buy permits

firms with low MAC

sell permits

what does banking of emissions allow

reduced price volatility at the end of trading periods, greater flexibility to reduce costs

in a simple model, how are taxes and trading related

they are equivalent

where is welfare loss for over/underestimating permits

triangles between Q* and Qlow optimal and Qhigh optimal

where is welfare loss for over/underestimating taxes

triangles between P* and Plow and Phigh optimal

steeper MSB does what to lost welfare with permits

reduces lost welfare

steeper MSB does what to lost welfare with taxes

increases lost welfare

if MSB is steeper than MSC

quantity-based policy (permits) is better

If MSC is steeper than MSB

price based policy (tax) is better

what is total government revenue for a tax

(total uncontrolled pollution - total abatement) * tax price

what is total government revenue for a subsidy

total abatement * subsidy price

what is TAC cost graphically

integral from 0 to abatement level of firms MAC function

what is required abatement level graphically

uncontrolled abatement - allowed pollution

what is total benefit from pigouvian tax graphically

0.5 x quantity reduction x MED at market quantity

what is the slope for MSB for GHG emissions

flat

safety valve

allow polluters to pay a fee to exceed their quotas, or release extra permits if permit prices exceed a certain level

what is the benefit of a safety valve

effectively caps prices, reduces price volatility

when can emissions trading give rise to market power

too few participants, one polluter is a big buyer or seller

with taxes, polluters are always

price takers

if some polluter has market power price

does not equal MAC

with non uniform pollutants, equal MACs

may not be optimal

what is important when dealing with non uniform pollutants

source of pollution, e.g upwind sources

what is tax price for non-uniform pollutants

equal to MED for each facility

zonal trading

divide polluters into separate markets

trading ratios

require more allowances for more damaging polluters

ambient pollution permits

trade right to elevate pollution at given air pollution monitor

induced innovation

innovation that arises from opportunities for profit

which policy is weakest for innovation

tech standards

which policy is strongest for innovation

taxes

for innovation, performance standard and permits are

weaker than taxes, stronger than tech standard

what is the initial cost to a polluter before innovation FOR TAX POLICY graphically

area under MAC + tax revenue

what is tax revenue graphically

square from where MAC intersects tax price to uncontrolled pollution

what is total cost saved after innovation/incentive to innovate graphically?

triangle between initial MAC and MAC after innovation

what is the initial cost to a polluter before innovation FOR PERFORMANCE STANDARD graphically

area under MAC

how does innovation work under emission trading

depend on effect of innovation on permit prices

What are direct funding advantages

new information can create a new public good, gov can act in absence of meaningful incentives

what are direct funding disadvantages

gov may have less info about tech possibilities, subject to political bias when choosing projects

monitoring

checking for compliance with regulation

inspections are usually done by

the state

enforcement

imposition of penalties for breaking regulations

expected cost of violation

probability of detection * penalty

benefits of violation (for performance standards)

abatement costs avoided

violation

difference between allowed and actual pollution

if marginal cost of violation is greater than 0

polluter may choose to partially comply

if expected cost of violation does not depend on extent of violation

either full compliance or no compliance

higher detection probabilities and higher fines are

substitute goods

higher fines are _____ than higher detection

cheaper

problems with high penalty approach

horizontal inequities, risk of false convictions, incentives to fight penalties

judgement proof problem

risk that violators are protected against penalties by bankruptcy

why do firms comply with standards

Reputational damage increases with the extent of the violation