1907 10-11 Ways of Correcting Market Failure Assumption:The market failure is pollution Fixed-proportion production technology Must reduce output to reduce emissions Use an output tax to reduce output Input substitution possible by altering technology Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-11 Ways of Correcting Market Failure • Assumption: The market failure is pollution – Fixed-proportion production technology • Must reduce output to reduce emissions • Use an output tax to reduce output – Input substitution possible by altering technology
10-12 The Efficient Level of Emissions Assume: 1)Competitive market Dollars 2)Output and emissions decisions are independent per unit 3)Profit maximizing output chosen of Emissions MSC 6 AtE。the marginal Why is this more efficient cost of abating emissions than zero emissions? is greater than the marginal social cost. 4 At E,the marginal social cost is greater than the marginal abating cost. The efficient level of 2 emissions is 12(E)where MCA MSC. MCA Eo E* 1E1 02468101214161820222426 Leyel of Emissions Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-12 The Efficient Level of Emissions Level of Emissions 2 4 6 Dollars per unit of Emissions 0 2 4 6 8 10 12 14 16 18 20 22 24 26 MSC MCA E* The efficient level of emissions is 12 (E*) where MCA = MSC. Assume: 1) Competitive market 2) Output and emissions decisions are independent 3) Profit maximizing output chosen At Eo the marginal cost of abating emissions is greater than the marginal social cost. E0 At E1 the marginal social cost is greater than the marginal abating cost. E1 Why is this more efficient than zero emissions?
1907 10-13 Ways of Correcting Market Failure 。 Options for Reducing Emissions to E* Emission Standard Set a legal limit on emissions at E*(12) Enforced by monetary and criminal penalties Increases the cost of production and the threshold price to enter the industry Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-13 Ways of Correcting Market Failure • Options for Reducing Emissions to E* – Emission Standard • Set a legal limit on emissions at E* (12) • Enforced by monetary and criminal penalties • Increases the cost of production and the threshold price to enter the industry
10-14 10 Standards and Fees Dollars per unit of Emissions MSC Standard Fee 3 MCA 2 Level of Emissions Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-14 Standards and Fees Level of Emissions Dollars per unit of Emissions MSC MCA 3 12 E* Standard Fee
1907 10-15 Ways of Correcting Market Failure Options for Reducing Emissions to Emissions Fee Charge levied on each unit of emission Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-15 • Options for Reducing Emissions to E* – Emissions Fee • Charge levied on each unit of emission Ways of Correcting Market Failure