climate policy Flashcards

Question

complications of tax and permits

Answer 1

marginal cost and benefit curve non linear damage function means there is a tipping point for climate change co pollutants moving patterns abatement costs vs hotspots

Answer 2

the marginal cost equation you want marginal damage = marginal benefits so take derivative of total damage and benefit equations and find the equilibrium m*, where net total benefits will be maximized m* is the scope of abatement: if m* is 25 miles, then 25 miles must not be polluted to save most money for firm

Answer 3

firm 1 and firm 2 must both abate emissions, say 25 miles of river. two options: (think equality vs equity...) have both firms abate emissions equally: find total abatement cost for each firm and sum it up and then divide in half to see how much the abatement costs each firm if they abate same amount find most cost-effective abatement plan: set both firms' marginal abatement cost equal to each other solve for the variable, perhaps you get 2a=a set these vals equal to total abatement plan 2a+a=25 miles ... solve for a if a = 8, then one firm abates 8 miles and the other abates 8*2 miles = 16 miles if you plug this in to each TAC equation the total cost should be LESS than the first method gets you

Answer 4

abatement TAC = total abatement cost MAC: marginal abatement cost remember MAC, or marginal damage equation, is the derivative of the TAC equation

Answer 5

say we want to reduce 50 units emissions down to 20 units emissions, for two firms. TAC1 = 100a^2. TAC2= 50a^2 both firms TC = 100a^2 + 50a^2 both firms TB = 9000a^2 - 150a^2 both firms MAC or MD = 300a both firms MAB = 18000a - 300a what we will do : 1. follow EMP 1 and do MAC = MAB. MAC, or derivative, we found is 300a MAB, or derivative TB, we found 18000a-300a 300a = 18000a - 300a a* = 30 since we know that we want to reduce emissions to 20 units, this is confirmed that a* is the 30 units we must reduce to get there. 2. dividing the abatement up boils down to: - command and control, where you calculate total abatement costs for all firms and divide up the reductions as a goverment -finding the cost effective abatement methods, which can be enforced with a pigouvian tax or permits (cap and trade) command and control finds: TAC = 11(30/2)^2 + 50(30/2)^2 = $33750 cost of abatement that govt would have firms pay cost effective, or EMP2 plan: MAC1 = MAC2 200a=100a. 2a1 = a2 a*1 = 10 a*2 = 20 TAC1 = 100(10)^2 = 10k. TAC2 = 50(20)^2 = 20k cost-effective TAC = $30,000 to enforce cost effective $30k abatement cost, we do tax or we do permit. 1. pigouvian tax goal: emissions tax = marginal damage knowing a*1 = 10 MAC1 = 200(10) = $2k knowing a*2 is 20 MAC2 = 100(20) = $2k also so the tax should be set at $2000 2. cap and trade find price of a permit for abatement of 30 units, which ineffectively could be 15 units abatement each firm. for firm 1 = after 10 units are abated, it would be cheaper to just pay next 5 units through permit than to continue abating firm 2 = they can make $ selling their permits because they can abate more and save money basically once you hit the price point of the tax/permit, abating past that price point means a price that is greater than that tax/permit price, so you would rather just pollute then. optimal tax = optimal permit price