Transcript AGEC/FNR 406 LECTURE 16 Marginal abatement cost function Marginal abatement = pollution reduction of one unit. The marginal abatement cost (MAC) function measures the dollar.

AGEC/FNR 406
LECTURE 16
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.
Marginal abatement cost function
Shape of curve depends on technology of clean-up
Cost
MAC
Marginal Abatement Cost
Total Abatement Cost
C1
E1
EU Emissions
Marginal damage function
Dollar measure of incremental
damage from pollution
Damages
MD
D
Total Damage
E
Emissions
Optimal level of pollution
Damages,
Costs
MAC
MD
Total Damage
Total Abatement Cost
E1
EU
Emissions
Socially inefficient (sub-optimal)
levels of pollution
Damages,
Costs
MAC
MD
Excess social
cost from too
much abatement
Excess social
cost from too
little abatement
E1
EU
Emissions
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.
Pollution tax
Goal: set tax = marginal damage cost
Why: encourage polluter to “internalize” the
externality
Key: Tax the externality, not the product.
Polluter behavior with tax
Costs
MAC = 10 - E
Potential Tax Payment
Tax=4
Tax Avoidance
T*Q=24
Actual Tax Payment
E1=6
EU=10
Emissions
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.