AGECFNR 406 LECTURE 16.ppt

* AGEC/FNR 406 LECTURE 16 Marginal abatement cost function Marginal abatement = pollution reduction of one unit. The marginal abatement cost (MAC) function measures the dollar amount of the cost of reducing pollution by one unit. Marginal abatement cost function Emissions E1 Cost MAC Total Abatement Cost C1 EU Marginal Abatement Cost Shape of curve depends on technology of clean-up Marginal damage function Dollar measure of incremental damage from pollution Emissions E Damages MD Total Damage D Optimal level of pollution Emissions E1 MAC Total Abatement Cost EU Damages,Costs MD Total Damage Socially inefficient (sub-optimal) levels of pollution Excess social cost from too much abatement Excess social cost from too little abatement Emissions E1 MAC EU Damages,Costs MD Advantages of Economic Incentives 1. In most cases economic incentives  will minimize the total costs of abatement. 2. By penalizing polluting behavior or rewarding clean behavior,  economic incentives tend to  encourage research into better abatement measures. Pollution tax Goal: set tax = marginal damage cost Why: encourage polluter to “internalize” the externality Key: Tax the externality, not the product. Actual Tax Payment Tax Avoidance Potential Tax Payment Polluter behavior with tax Emissions E1=6 Costs MAC = 10 - E Tax=4 EU=10 T*Q=24 Key points regarding tax 1. Tax achieves socially optimal level of pollution 2. MAC may exceed MD for some levels of  pollution. Therefore, the optimal level of  pollution is likely to be greater than 0. 3. Individual polluters adjusts emissions to point where MAC = tax, therefore MACs are equal for all polluters, which minimizes total cost of obtaining target level of pollution. *