Environmental regulation - Tax, Quota, Permits

Question 1

Optimal pollution level for firm j is such that…

Answer 1

… its marginal cost of depolluting is equal to the marginal damage

Question 2

Implies that at the optimum, all firms …

Answer 2

… bear the same marginal cost of depollution

Question 3

Pigouvian tax : principle ?

Answer 3

Impose a tax τ for each unit of pollution
Program of firm j: minimize costs
min qj : Cj(qj) + τ* qj
FOC : −C′(qj) = τ

Question 4

Subsidy : principle ?

Answer 4

Subsidize the firm for each unit of pollution below a reference level qref, subsidy s

Program of firm j: minimize costs :
min qj : Cj(qj) −s(qref−qj)
FOC:−C′(qj) =s

Question 5

Combining instruments :

Answer 5

Impose a tax that is used to subsidize and obtain a balanced budget : “Carrot and stick policy”

Program of the firm: min qj : (1−s)*Cj(qj) +τqj
FOC : −C′(qj) =τ1−s

Question 6

Pollution permits :

Answer 6

Cap and trade: impose a cap on the level of pollution for firms and allow them to trade

Question 7

Coase theorem :

Answer 7

Externalities constitute a problem only because there is no property right defined If we allow trading and negotiation between firms, we can get optimality of the decentralized equilibrium

Question 8

Empirical strategy to measure the effect of EU-ETS on production and pollution : Idea :

Answer 8

compare the plants that are regulated to plants that are not

Question 9

matching on propensity score :

Answer 9

Compare pollution and production for the regulated plants and their unregulated matches

Question 10

Two types of regulation on the car market (20% of CO2 emission)

Answer 10

“Demand-side”: subsidies for fuel efficient cars, taxes for inefficient ones or combination of the two (e.g. feebate in France)
“Supply-side”: fuel efficiency standard, minimal average fuel efficiency level each car manufacturer must meet (e.g. CAFE standards in the U.S.). If no compliance, a fine is paid for each car sold

Question 11

Feebate regulation in the car market / explanations :

Answer 11

Feebate (e.g. “bonus/malus écologique” in France), φ with is a linear function of the difference between the fuel efficiency of the car ej (in km/L or miles per gallon, MPG) and a pivot point ( ̄e):
φj = τ( ̄e − ej )

Question 12

Fuel efficiency standard : explanation :

Answer 12

ê the fuel efficiency standard that each car manufacturer must meet on
average on the cars they sell, i.e.:
e1q1 + e2q2 / q1 + q2 ≥ ê
the problem become a maximasition problem

Question 13

For a fee, there is an interest to :

Answer 13

decrease the posted price and decrease
the margin to avoid too much decrease of sales due to the fee. For a rebate, there is an interest to increase the posted price and increase the margin because the rebate is boosting the sales

Question 14

For other manufacturers ( who doon’t reach the standat limit) they need to :

Answer 14

modify their prices to reach compliance, this is costly so they will never be above the standard but reach it exactly, the constraint will be binding