Standards and Fees er unit of emissions MSC Cost is less than the fee if emissions Fee not reduced Total Fee MCA of Abatement*I Abatement Cost 12 Chapter 18 Level of emissions Slide 16
Chapter 18 Slide 16 Total Abatement Cost Cost is less than the fee if emissions were not reduced. Total Fee of Abatement Standards and Fees Level of Emissions Dollars per unit of Emissions MSC MCA 3 12 E* Fee
Ways of Correcting Market Failure a Standards Versus fees Assumptions Policymakers have asymmetric information e Administrative costs require the same fee or standard for all firms Chapter 18 Slide 17
Chapter 18 Slide 17 ◼ Standards Versus Fees ⚫ Assumptions ◆Policymakers have asymmetric information ◆Administrative costs require the same fee or standard for all firms Ways of Correcting Market Failure
The Case for Fees The impact of a standard of abatement of 7 for both firms Fee per is illustrated Unit o MCA1 Not efficient because Emissions MCA2 ACA2 MCA1 If a fee of $3 was imposed Firm 1 emissions would fal The cost minimizing solution by 6 to 8. Firm 2 emissions would be an abatement of 6 would fall by 8 to 6 for firm 1 and 8 for firm 2 and MCA1= MCAz: efficient solution MCA=MCA,=$3 3.75 Firm 1s Increased 2.50 Abatement Costs Firm 2s reduced Abatement Cos Levelof 0123456 9 10 11 12 13 14 Emissions Chapter 18 Slide 18
Chapter 18 Slide 18 Firm 2’s Reduced Abatement Costs Firm 1’s Increased Abatement Costs MCA1 MCA2 The Case for Fees Level of Emissions 2 4 6 Fee per Unit of Emissions 0 1 2 3 4 5 6 7 8 9 10 11 12 13 1 3 5 14 The cost minimizing solution would be an abatement of 6 for firm 1 and 8 for firm 2 and MCA1= MCA2 = $3. 3.75 2.50 The impact of a standard of abatement of 7 for both firms is illustrated. Not efficient because MCA2 < MCA1. If a fee of $3 was imposed Firm 1 emissions would fall by 6 to 8. Firm 2 emissions would fall by 8 to 6. MCA1 = MCA2: efficient solution
Ways of Correcting Market Failure ■ Advantages of Fees When equal standards must be used fees achieve the same emission abatement at lower cost e Fees create an incentive to install equipment that would reduce emissions further Chapter 18 Slide 19
Chapter 18 Slide 19 ◼ Advantages of Fees ⚫ When equal standards must be used, fees achieve the same emission abatement at lower cost. ⚫ Fees create an incentive to install equipment that would reduce emissions further. Ways of Correcting Market Failure
The case for standards Fee per c Based on incomplete Unit of 16 (12.5% reduction). Emissions Marginal Emission increases to 11 Social 14 Cost ABC is the increase 12 in social cost less the decrease in abatement 10 cost A B Based on incomplete information standard is 9 (12.5% decrease ) ADE< ABC Marginal Cost of Abatement 0 2 4 6 8 10 12 14 16 Level of emissions hapter 18 Slide 20
Chapter 18 Slide 20 ABC is the increase in social cost less the decrease in abatement cost. Marginal Social Cost Marginal Cost of Abatement The Case for Standards Level of Emissions Fee per Unit of Emissions 0 2 4 6 8 10 12 14 16 2 4 6 8 10 12 14 16 E Based on incomplete information standard is 9 (12.5% decrease). ADE < ABC D A B C Based on incomplete information fee is $7 (12.5% reduction). Emission increases to 11