Question

A Suppose that in a cap-and-trade policy, the government sets the cap according to the expected marginal abatement cost, and expects the equilibrium price of a permit to be $40. However, the government observes the equilibrium price of a permit to be $33. So it suggests that the government should decrease increase its expectation of the true abatement cost. B According to the Weitzman rule, when the of abatement is uncertain, tax and cap-and-trade can lead to different outcomes. Specifically, if the curve is relatively steep, is preferred because it creates a smaller However, if that curve is relatively flat, the opposite is true. marginal cost marginal benefit marginal benefit marginal cost tax cap-and-trade deadweight loss social surplus emission quantity abatement quantity

          A
Suppose that in a cap-and-trade policy, the government sets the cap according to the expected
marginal abatement cost, and expects the equilibrium price of a permit to be $40.
However, the government observes the equilibrium price of a permit to be $33. So it suggests that
the government should
decrease increase its expectation of the true abatement cost.
B
According to the Weitzman rule, when the
of abatement is uncertain, tax and
cap-and-trade can lead to different outcomes.
Specifically, if the
curve is relatively steep,
is preferred because
it creates a smaller
However, if that curve is relatively flat, the opposite is true.
marginal cost marginal benefit
marginal benefit marginal cost
tax cap-and-trade
deadweight loss social surplus emission quantity abatement quantity

A
Suppose that in a cap-and-trade policy, the government sets the cap according to the expected
marginal abatement cost, and expects the equilibrium price of a permit to be 40.
However, the government observes the equilibrium price of a permit to be33. So it suggests that
the government should
decrease increase its expectation of the true abatement cost.
B
According to the Weitzman rule, when the
of abatement is uncertain, tax and
cap-and-trade can lead to different outcomes.
Specifically, if the
curve is relatively steep,
is preferred because
it creates a smaller
However, if that curve is relatively flat, the opposite is true.
marginal cost marginal benefit
marginal benefit marginal cost
tax cap-and-trade
deadweight loss social surplus emission quantity abatement quantity

Added by Kenneth C.

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