Environmental Economics

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Environmental Economics
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Cost of Reducing Pollution
Total abatement Costs Area A

MACa
Ca
A
Pa
Greater Abatement
Pollution Reduction
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Command and control

• Legislate emission levels
• All firms required to reduce pollution to
  specific levels
• ef is maximum pollution
• Forced to cut in half (0.5ef)
• What are costs of abatement?

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Firm 1
Firm 2


(High cost firm)
MAC2
C2
(Low cost firm)
MAC1
C1
(ef,0)
(0,ef)
.5ef
Total abatement for firm 2
Total abatement for firm 1
Abatement
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Firm 2
Firm 1
Total abatement Costs adfbg


C2
d
Ce
f
C1
a
b
g
.5ef
Abatement
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Taxes

• Instead of command and control, why not tax
  emission
• Requires continuous monitoring
• In this case, Ce is per unit tax
• Two characteristics
• Equal cost at the margin for both firms
• Will show it holds total pollution constant to
  command and control levels

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Firm 2
Firm 1
Total abatement Costs adfbg


C2
d
Ce
f
C1
a
b
g
.5ef
Abatement
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Firm 2
Firm 1
Total abatement Costs abg


Total cost savingsdf
C2
d
Ce
Ce
f
C1
a
b
g
.5ef
e1
Taxes paid, Firm 2
Taxes paid, Firm 1
Abatement
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Firm 2
Firm 1


C2
d
Ce
Ce
f
C1
a
b
g
.5ef
Abatement
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Firm 2
Firm 1


C2
d
Ce
Ce
f
C1
a
b
g
.5ef
e1
Abatement
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Cap and trade

• Start with command and control levels
• Receive permit to pollute 0.5ef
• must abate 0.5ef
• However, you can increase pollution levels only
  if you purchase the right to pollute from another
  manufacturer
• Who would sell their right to pollute? Who would
  purchase?

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Firm 2
Firm 1


C2
d
Ce
Ce
f
C1
a
b
g
.5ef
e1
Abatement
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Firm 2
Firm 1


C2
d
Ce
Ce
f
C1
a
b
g
.5ef
e1
Abatement
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• Firm 2
• Willing to pay area dfb for the right to
  pollute more
• Firm 1
• Needs b to increase pollution
• Trade will take place
• Notice that both firms are better off
• Costs of a abatement have fallen by df