Economics 3220 Lecture Notes - E Number

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Published on 16 Apr 2013
School
UofL
Department
Economics
Course
Economics 3220
Professor
Chapter 14-1
Uncertainty about MD curve
Recall our assumption:
o If government has perfect knowledge of the MAC and MD curves, it
can determine the socially efficient standard/tax/subsidy/permits by
equating the MAC curve to the MD curve
What id the assumption is not true:
o Government is uncertain about the location of the MD curve.
MDT = True MD curve, Socially efficient emission is at E*
MDE= Estimated curve, estimated socially efficient emission is
at E
So government would set the standard to E’ level
Number of permits at E’
Number of taxes at E’
o At point A
TAC=E0aE’
TDC= 0CE’
TSC= E0aE’ + OCE’ = ObE0 + abc
o At point B
TAC= E0bE*
TDC= 0bE*
TSC= E0E* + 0bE* = 0bE0
o So social losses (or DWL) = (0bE0 + abc) -0bE0 = abc
For total damage go by the actual not the estimated
Steep MD curve
Uncertainty about the abatement curve
MDT = True MD curve, Socially efficient emission is at E*
MDE= Estimated curve, estimated socially efficient emission is
at E
o Govt sets standard at E’ level
o Number of permits E’
o Number of taxes at E’
At point A
o TAC= E0aE*
o TDC=
o
For tax policy:
o If governemtn sets tax at E’ polluters equate it with the true MAC T
curve, resulting to E’’ level emissions, which is >E’
At point f:
o TAC= E0fE’’
o TDC= E1dE’’
o TSC= EofE’’
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Document Summary

Chapter 14-1: if government has perfect knowledge of the mac and md curves, it can determine the socially efficient standard/tax/subsidy/permits by equating the mac curve to the md curve. What id the assumption is not true: government is uncertain about the location of the md curve. Mde= estimated curve, estimated socially efficient emission is at e. So government would set the standard to e" level. Number of taxes at e": at point a. Tsc= e0ae" + oce" = obe0 + abc: at point b. Tsc= e0e* + 0be* = 0be0: so social losses (or dwl) = (0be0 + abc) -0be0 = abc. For total damage go by the actual not the estimated. At point a: tac= e0ae, tdc= For tax policy: if governemtn sets tax at e" polluters equate it with the true mac t curve, resulting to e"" level emissions, which is >e". At point f: tac= e0fe"", tdc= e1de"", tsc= eofe"".

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