Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure 17.4. Should the government use an emissions fee or an emissions standard to maximize expected welfare? Explain. (Hint: Use an analysis similar to that employed in Figure 17.4.)

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| Suppose that the government knows the marginal cost, MC, curve of reducing
pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the
government faces a relatively high or a relatively low MB curve, so its expected MB curve is
the same as the one in Figure 17.4. Should the government use an emissions fee or an
emissions standard to maximize expected welfare? Explain. (Hint: Use an analysis similar to
that employed in Figure 17.4.)
Transcribed Image Text:| Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure 17.4. Should the government use an emissions fee or an emissions standard to maximize expected welfare? Explain. (Hint: Use an analysis similar to that employed in Figure 17.4.)
(a) Cost and Benefit
4,000
Cost: less paper
Benefit: less gunk
2,000
Maximum
net
benefit
105
Q, Tons of paper per day
- G, Units of gunk per day
84
63
(b) Marginal Cost and Marginal Benefit
105
MC
84
MB
105
Q, Tons of paper per day
84
G, Units of gunk per day
Marginal benefit,
Marginal cost, $
Benefit, Cost, $
Transcribed Image Text:(a) Cost and Benefit 4,000 Cost: less paper Benefit: less gunk 2,000 Maximum net benefit 105 Q, Tons of paper per day - G, Units of gunk per day 84 63 (b) Marginal Cost and Marginal Benefit 105 MC 84 MB 105 Q, Tons of paper per day 84 G, Units of gunk per day Marginal benefit, Marginal cost, $ Benefit, Cost, $
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