Question

Under which circumstances would you expect the TACs to be higher – under the uniform standard or under the optimal allocation of abatement? Why?

Answer 1

Total abatement costs or TACs are the costs for removing and reducing the residuals and undesirable elements which cause a negative externality or effect from the environment such as pollution.

under the uniform standard there exists ineffectiveness of costs. under the command and control policy ( that directs the polluters about the standards) we have standards being imposed uniformily.

under this type , there is wastage of resources since we have different firms . and in order to reduce emissions we simply equate the marginal damageMD to uniform standard. since the firms are heterogeneous in nature and have different abatement costs , this method is not cost effective method. also it is beneficial in some cases where there is less or no information about abatement cost of individual firms or when the marginal abatement costs or MACs are similar of various firms.

under optimal allocation of abatement , we equate the MACs of various firms to marginal damage MD to get efficient levels. also here we can use the individual standards since MACs are available. this type is cost effective and TACs is lower in this type of allocations but they require the MACs of the firms to be known which in some situations is difficult to obtain.

so MAC1 =MAC2 =MD and we get effective levels of firms 1 and 2 which is different given the firms have different MACs and are heterogenous in nature.