(d) Suppose there is a single firm whose profits are determined by: 1 B(E) = 10E - E², where E denotes emissions and the expected damages associated with E is given by: Ө ED(E)=πE² + (1 - + (1 − π)²², where 0 <<ẞ. Suppose that the true level of damages is actually equal to 0 D(E) = E². Page 4 of 5 ES3 Show that under uncertainty the policymaker is indifferent between using a Pigouvian tax or a standard to control pollution. Illustrate your answer with a diagram.
(d) Suppose there is a single firm whose profits are determined by: 1 B(E) = 10E - E², where E denotes emissions and the expected damages associated with E is given by: Ө ED(E)=πE² + (1 - + (1 − π)²², where 0 <<ẞ. Suppose that the true level of damages is actually equal to 0 D(E) = E². Page 4 of 5 ES3 Show that under uncertainty the policymaker is indifferent between using a Pigouvian tax or a standard to control pollution. Illustrate your answer with a diagram.
Chapter28: Antitrust And Regulation
Section: Chapter Questions
Problem 7E
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Transcribed Image Text:(d) Suppose there is a single firm whose profits are determined by:
1
B(E) = 10E - E²,
where E denotes emissions and the expected damages
associated with E is given by:
Ө
ED(E)=πE² + (1 -
+ (1 − π)²²,
where 0 <<ẞ. Suppose that the true level of damages is
actually equal to
0
D(E) = E².
Page 4 of 5
ES3
Show that under uncertainty the policymaker is indifferent between
using a Pigouvian tax or a standard to control pollution. Illustrate your
answer with a diagram.
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