Piguovian taxes

1
AGEC/FNR 406
LECTURE 16
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Marginal abatement cost function
Marginal abatement pollution reduction of one
unit.
The marginal abatement cost (MAC) function
measures the dollar amount of the cost of
reducing pollution by one unit.
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Marginal abatement cost function
Shape of curve depends on technology of clean-up
MAC
Cost
Marginal Abatement Cost
Total Abatement Cost
C1
Emissions
E1
EU
4
Marginal damage function
Dollar measure of incremental damage from
pollution
5
Optimal level of pollution
Damages,Costs
MAC
MD
Total Abatement Cost
Total Damage
Emissions
E1
EU
6
Socially inefficient (sub-optimal) levels of
pollution
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Advantages of Economic Incentives
1. In most cases economic incentives will
minimize the total costs of abatement.
2. By penalizing polluting behavior or
rewarding clean behavior, economic incentives
tend to encourage research into
better abatement measures.
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Pollution tax
Goal set tax marginal damage cost Why
encourage polluter to internalize the
externality Key Tax the externality, not the
product.
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Polluter behavior with tax
Costs
MAC 10 - E
Tax4
TQ24
Emissions
E16
EU10
10
Key points regarding tax
1. Tax achieves socially optimal level of
pollution
2. MAC may exceed MD for some levels of
pollution. Therefore, the optimal level of
pollution is likely to be greater than 0.
3. Individual polluters adjusts emissions to
point where MAC tax, therefore MACs are
equal for all polluters, which minimizes total
cost of obtaining target level of pollution.