The Market for Pollution Reduction

Question 1

things firms can do to decrease pollution without decreasing product

Answer 1

1. Capture the pollution or counteract its effects
   – responsibly dispose of sludge, install catalytic converters, . . .
2. Develop production processes that are less polluting
   – replace gas-powered machines with electric one

Question 2

The Market for Pollution Reduction

Answer 2

An analytical framework that is used to analyze a firm’s decision on whether or not to spend money so as to reduce pollution
aka the market for pollution abatement, or the market for abatement

Question 3

Horizontal Axis

Answer 3

the quantity of pollution that is reduced
— the amount of abatement
— is where no pollution is abated (Pfull )
— Rfull is where all pollution is abated

Question 4

Vertical Axis

Answer 4

Dollars
— Diagram has multiple curves, all of which are measured in $

Question 5

Private Marginal Benefit (PMB)

Answer 5

The benefit to a firm from reducing an additional unit of pollution
— Pollution is an externality ⇒ no benefit to the firm in reducing i

Question 6

Marginal External Damage

Answer 6

the damage to 3rd-parties from emitting an additional unit of pollution
— can be constant

Question 7

Social Marginal Benefit

Answer 7

the benefit to society from reducing an additional unit of pollution

Question 8

Private Marginal Cost

Answer 8

the cost to a firm from abating an additional unit of pollution
— Upward sloping: easy for the first few units; then harder and harder

Question 9

Market Eq

Answer 9

where PMB = PMC

Question 10

Efficient Eq

Answer 10

where SMB = SMC

Question 11

Deadweight Loss

Answer 11

the difference in social surplus between the efficient and market equilibria
— The triangle below SMB and above SMC
— For units up to R∗, the social benefits from ↓ pollution > the costs

Question 12

Market’s Marginal Cost (MCt)

Answer 12

the max. amount of abatement that the market can achieve at a given marginal cost
→ the horizontal sum of MCA and MCB
— Also, the social marginal cost, SMC

Question 13

Cap and Trade System

Answer 13

1. Gov. allows firms to emit a certain total amount of pollution (X units)
2. Gov. creates permits that give the holder the right to emit one unit
3. Gov. distributes X permits to the firms and allows them to trade
4. They trade until the MC of abatement is the same for each firm

Question 14

Gently Sloped MD curve

Answer 14

with the DWL, the quantity regulation is better than the corrective tax

Question 15

Steeply Sloped MD curve

Answer 15

with the DWL, the corrective tax is better than the quantity regulation

Question 16

Quantity regulation: gov controls

Answer 16

quantity of abatement, but not the MC

Question 17

Corrective Tax: gov controls

Answer 17

the marginal cost, but not the quantity