Question

One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax of $blank per ton of radioactive waste emitted will achieve the desired level of pollution.

a) 10
b) 50
c) 100
d) 200

Answer 1

Firms facing a pollution tax must decide whether to reduce emissions or pay the tax. In this case, the firm will abate the first 30 pounds of pollution because the abatement cost for this amount is less than the imposed tax, and will not abate beyond that because the cost exceeds the tax.

Step-by-step explanation:

When a government imposes a per-unit tax on emissions, firms must decide whether to pay the tax or to abate the pollution. In the scenario provided, a firm faces a pollution tax of $1,000 for every 10 pounds of particulates emitted. The decision-making process for the firm is driven by a comparison of the cost of abatement versus the cost of the tax. The firm will compare the abatement cost for each incremental 10 pounds of particulate reduction to the tax it would owe if it opted not to abate:

• The first 10 pounds cost $300 to abate - the firm will abate because it is cheaper than the tax.
• The second 10 pounds cost $500 to abate - the firm will continue to abate as it remains less expensive than the tax.
• The third 10 pounds cost $900 to abate - abatement is still preferred as it is slightly cheaper than the tax.
• The fourth 10 pounds cost $1,500 to abate - the firm will choose to pay the tax on this portion because the abatement cost exceeds the tax.

As a result, the firm will reduce pollution by 30 pounds, which is where the marginal cost of abatement equals the cost of the pollution tax. Any further reduction in emissions would cost more than paying the tax, and hence, provides no financial incentive to the firm to abate beyond the 30 pounds. This taxes approach demonstrates how economic incentives can be used to regulate pollution more effectively where measuring the exact externality is challenging.