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’’

## 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"".