Intermediate Microeconomics · free preview
Energy Policy, Tax versus Cap
A carbon tax is a price instrument and cap and trade a quantity instrument, and with certain costs they are equivalent, a tax at t matching a cap where marginal abatement cost equals t, the choice between them turning on uncertainty over costs and benefits.
1. The abatement curve
The abatement curve
2. Equivalence under certainty
Equivalence under certainty
3. Uncertainty breaks the tie
Uncertainty breaks the tie
4. The competitive half-course sealed
The competitive half-course sealed
5. The two instruments
What distinguishes a carbon tax from cap and trade in the diagram?
6. The permit market
Inside a cap, why do firms trade permits?
7. When to prefer the tax
Under cost uncertainty, when is the price instrument preferred?
8. The equivalence content
What exactly does the tax-cap equivalence claim?
9. Abatement at the tax
If MAC equals 30 at abatement of 200 tons and the tax is 30, write the induced abatement in tons.
10. The permit price
A cap fixes abatement at 200 tons where MAC is 30. What permit price emerges? Write the number.
11. The cheap abater sells
A firm's next ton of abatement costs 25 and the permit price is 30. What should it do?
12. The dear abater buys
A firm's next ton of abatement costs 45 and the permit price is 30. What should it do?
13. Costs come in higher than planned
The cap is fixed at 200 tons of abatement, but abatement turns out costlier than planners expected. What happens?
14. The collar compromise
What is a cap with a price floor and ceiling, the design the lesson describes?
15. The buyer's saving
A firm facing a permit price of 30 would pay 45 to abate its last required ton. Compute its saving from buying the permit, and write the number.
16. The seller's margin
A firm abating a ton for 25 sells its freed permit at 30. Compute its gain, and write the number.
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