Question

Suppose that a government imposes an emission standard, and per unit fines for exceeding the standard, at the socially efficient pollution level. If polluters believe that the probability of detecting standard breaches is not certain, illustrate the privately efficient outcome and any associated welfare loss. What per unit fine would induce the socially efficient outcome?

Answer 1

An emission standard is a type of command and control technique which is also known as direct regulation. It sets a type of regulation set by the government where government commands the public not to emit pollutant beyond a certain level and controls the level of pollution in the atmosphere.

Suppose the marginal damage caused by the emission is MD and marginal abatement cost, the cost of reducing the emission in the atmosphere is MAC. The socially effciient outcome is where

MD = MAC

Suppose MD = 20E

MAC = 800 - 4E

So the socially efficient outcome would be , where MD = MAC

20E = 800 - 4E

20E + 4E = 800

24E = 800

E = 800 / 24

= 33.3

So the socially efficient outcome is 33.3.