EC238 Chapter Notes - Chapter 4: Allocative Efficiency, Marginal Cost
Document Summary
Msb of abatement: additional social gains as pollution abatement increases, measured as reduction in damages or costs caused by pollution, represents society"s d for environmental quality. Msc of abatement: sum of all polluters costs plus government"s marginal cost of enforcement, two components: msc = macmkt + mce. Macmkt: sum of all polluters" individual marginal abatement cost (mac) functions. Change in government"s cost of monitoring and enforcing abatement: msc is positively sloped. Firm level mac: measures the change in cost from reducing pollution. Equals forgone m if least-cost abatement method is to reduce output: typical positively sloped and increasing. Allocatively efficient level of a (ae: ae occurs at the point where: Msb of abatement = msc of abatement. Why standards may not be efficient: legislative constraints. Set to improve society"s well-being with no consideration for the associated cost: imperfect information. Msb: due to the problem of nonrevelation of preferences.
