In order to evaluate the relative advantages of taxes or emissions standards in the face of asymmetric information, suppose that the regulator has an imperfect estimate but cannot exactly observe the firm's abatement cost. More precisely, suppose that the marginal abatement cost estimated by the government is MCA = 2A but the actual marginal cost is MCA = 2A+10. Moreover, suppose that the marginal benefit of abatement MBA is known by the government. Consider the following two extreme scenarios: (i) MBA is vertical at A = 30 and (ii) MBA = 60 at every A (so it is horizontal at 60). For each one of these cases, obtain the Pigouvian Tax t⁰ and the Emissions Standard A⁰ that the government would impose based on estimated abatement costs, provide graphical representations, and calculate respective deadweight losses. Can you intuitively draw some conclusion about the type of industries in which taxes are preferred to standards and vice versa.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In order to evaluate the relative advantages of taxes or emissions standards in the face of asymmetric information, suppose that the regulator has an imperfect estimate but cannot exactly observe the firm's abatement cost. More precisely, suppose that the marginal abatement cost estimated by the government is MC_A = 2A but the actual marginal cost is MC_A = 2A+10. Moreover, suppose that the marginal benefit of abatement MB_A is known by the government. Consider the following two extreme scenarios: (i) MB_Ais vertical at A = 30 and (ii) MB_A= 60 at every A (so it is horizontal at 60). For each one of these cases, obtain the Pigouvian Tax t⁰ and the Emissions Standard A⁰ that the government would impose based on estimated abatement costs, provide graphical representations, and calculate respective deadweight losses. Can you intuitively draw some conclusion about the type of industries in which taxes are preferred to standards and vice versa.

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