Under some conditions, command-and-control pollution standards could be just as good as a cap-and-trade program at bringing about a cost-effective allocation of total abatement responsibility across firms. Furthermore, the regulator could save the cost of running a cap-and-trade program. When would this most likely be the case? a.) If firms have very different technologies, are varying sizes, and there is a mix of older and newer plants, so it is safe to assume that the firms probably have very different marginal abatement cost curves. b.) If all firms have the same types of technologies, are about the same size, and have been in production for approximately the same length of time, so it is safe to assume that each firm’s abatement costs are similar, and the regulator can issue a one-size-fits-all standard. c.) If the regulator gathers detailed information about the technologies employed by every firm so it can figure out each firm’s marginal abatement cost curve. The regulator can then assign firm-specific pollution abatement standards that equalize marginal abatement costs across all firms. d.) If the regulated firms are very different but it is possible to monitor each firm’s actual level of emissions, even though their marginal abatement cost curves are unknown.

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 5PA

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Under some conditions, command-and-control pollution standards could be just as good as a cap-and-trade program at bringing about a cost-effective allocation of total abatement responsibility across firms. Furthermore, the regulator could save the cost of running a cap-and-trade program. When would this most likely be the case?

a.) If firms have very different technologies, are varying sizes, and there is a mix of older and newer plants, so it is safe to assume that the firms probably have very different marginal abatement cost curves.

b.) If all firms have the same types of technologies, are about the same size, and have been in production for approximately the same length of time, so it is safe to assume that each firm’s abatement costs are similar, and the regulator can issue a one-size-fits-all standard.

c.) If the regulator gathers detailed information about the technologies employed by every firm so it can figure out each firm’s marginal abatement cost curve. The regulator can then assign firm-specific pollution abatement standards that equalize marginal abatement costs across all firms.

d.) If the regulated firms are very different but it is possible to monitor each firm’s actual level of emissions, even though their marginal abatement cost curves are unknown.

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