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ECON 3220 (17)
Ali Kamar (17)
Lecture

Chapter 14.docx

3 Pages
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Department
Economics
Course Code
ECON 3220
Professor
Ali Kamar

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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.  MD = True MD curve, Socially efficient emission is at E*  MD = 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=E a0’  TDC= 0CE’  TSC= E 0E’ + OCE’ = ObE +0abc o At point B  TAC= E 0E*  TDC= 0bE*  TSC= E 0* + 0bE* = 0bE 0 o So social losses (or DWL) = (0bE + abc) -0bE = abc 0 0  For total damage go by the actual not the estimated Steep MD curve  Uncertainty about the abatement curve  MD = True MD curve, Socially efficient emission is at E* E  MD = 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= E aE0 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= E dE1’ o TSC= EofE’’  E aE0+ adf 1 Flat MD curve  MD = True MD curve, Socially efficient emission is at E*  MD = Estimated curve, estimated socially efficient emission is a
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