Question

Explain (Briefly) why economists believe uniform standards are suboptimal policies when there are heterogeneous sources, i.e., firms with different MAC curves with mixing emissions.

Answer 1

This is because firms with different MACs have different ability and bear different cost when they decide how much to abate. A regulator may not have prior knowledge of what the abatement costs are or what is the respective MACs. In such a case it is prefered that a tax and not a uniform standard is implemented. Secondly, social compliance cost and deadweight loss is lower under a tax than a uniform standard because tax is cost effective and firms have an incentive to reduce more emission when they are taxes than when they are required a standard to follow. Hence uniform standards are suboptimal policies when there are heterogeneous sources,