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In: Economics

Assume that in a MD-MAC model, the MD curve is not known with certainty and the...

Assume that in a MD-MAC model, the MD curve is not known with certainty and the MAC curve is known with certainty. Assumethe estimated MD curve is abovethe actual MD curve. What is the optimization problem for the First Best and Second Best? Which policy is the first best choice e.g. Pigouvian tax, TEP etc? Which pollution abatement policy is the second best choice?

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Expert Solution

second-best decision rule for regulators when there is uncertainty about MD curve is to minimize the social loss associated with the policy choice.

Social loss (abc) in fig s the area between the MD and MAC curves from the pollutionactual a level to the socially efficient level.

Rahul Sunny answered 2 years ago
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