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ECON-260-Chapter 12.pdf

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Simon Fraser University
ECON 260
Chris Bidner

Econ 260 Chapter 11 Standards • Standards are a government designed or centralized policy. • Emissions standard = a maximum rate of emissions legally allowed. $ standard TAC MAC E • Firms pay TAC only, called the compliance costs. • Violators are fined. 1 Types of Standards: 1. Ambient standards = maximum levels of pollutants in the ambient environment. • Generally set as monthly or yearly averages. o E.g. Average SO2 levels should not exceed 23 parts per billion each year. 2. Emissions standards = maximum emissions from specific sources. • E.g. limits on g/hour, total per unit of output, or concentrations per unit of input o E.g. Air care 3. Technology standards = a certain technology is required by law. • E.g. Energy efficient big screen televisions in California • Can also be design or engineering standards, product or input standards o E.g. unleaded gasoline 2 The Economics of Standards Setting the level of the standard: • All standards should be set at E* for efficiency, but lobby groups try to influence government decisions. • If the government wants to avoid any environmental damage they may set a zero-risk standard. o This involves setting a standard such that the marginal damage is zero. o This could be at zero emissions for an accumulative pollutant, or at the threshold for a non-accumulative pollutant. $ accumulative MD MD non-accumulative Threshold E 3 • Or the government could define a maximum amount of total damages. o Then the emissions depend on the marginal damages. E.g. TD cannot exceed $20. A rural area has MD = 0.25E and an urban area has MD = 0.5E u $ u MD = 0.5E r MD = 0.25E Eu Er E For the urban area: TD = 20 = E(0.5E)(0.5) = 0.25E 2 20/0.25 = E 2 E = 8.94 For the rural area: TD = 20 = E(0.25E)(0.5) = 0.125E 2 20/0.125 = E 2 E = 12.65 4 Uniform Standards • Should all polluters face the same standard? • E* is the goal, so it depends whether or not E* is the same everywhere. • Marginal damages will differ across regions because of differences in populations and climate. Example: Vancouver and Saskatoon Assuming MAC is the same in each city, the efficient level of emissions will be different. $ Vancouver $ Saskatoon MD V a b MD S MAC MAC E * E * E E * E * E • A uniform standard cannot be efficient in both cities. o Es* will be too lenient for Vancouver: excess total social costs = area a o Ev* will be too strict for Saskatoon: excess total social costs = area b o It is
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