Consider a situation in which the government has limited information about costs
ID: 2439525 • Letter: C
Question
Consider a situation in which the government has limited information about costs and benefits of pollution abatement associated with a given industry. However, it is known that the marginal social cost curve for emissions is much steeper than the marginal cost of abatement curve (in absolute terms). In this situation, which method of emissions control is preferable when the greatest concern is with accuracy of control rather than the cost of control? That is, should a fee be used or should be used? Explain.
Explanation / Answer
In this situation, a standard method of emission is preferable than a fee.
The reason for this would be that for any percent of error in either of the methods stated, the fee would produce a much higher social cost as compared to any other method. Also, facts state that when there is no clear or complete information available standard are considered to be a better measure of certainty about the emissions level but even with this benefit that is one drawback, that is, standards do not provide a certain measure of abatement costs. On the other hand, fees do provide a certain measure of the costs but then it leaves the reductions in emissions uncertain.
One factor that would prove important in determining which method of control yields the greatest variation in possible increase in social cost is the relative slopes of the curves.